October 8, 2003
U.S. auto insurance is not only fairer, it’s cheaper, thanks to free enterprise. Politicians and other advocates of state control should keep that in mind.
Throughout North America, advocates call for auto insurance reforms. In Canada, the advocates are mostly provincial politicians fearful of being turfed out of office and the Consumers Association of Canada. They tend to seek lower insurance premiums by limiting choice in insurance providers or curtailing claims paid to consumers.
In the United States, the advocates include everyone from consumer and safety organizations to environmental groups and members of the insurance industry itself. They tend to seek lower premiums by increasing the types of insurance on offer and increasing competition.
Which approach best serves consumers? The U.S. system wins hands down. While Canadians are up in arms over our automobile insurance policies, Americans love theirs: 86% of Americans, a RoperASW survey reports, are very or fairly satisfied with their auto policies.
In the United States, according to the most recent statistics, Americans actually spent, on average, US$718 for auto insurance, while the cost of comprehensive insurance coverage that includes both liability and collision comes to US$817. In Canada, consumers pay far more for their auto insurance, if a recent study by the Consumers Association of Canada is to be believed. This despite the high court awards that U.S. juries hand out and the high wages that Americans earn, both big factors in establishing rates. To take one well-publicized example, the CAC study found that the average premium paid in Ontario was $2,450. Across the border in New York State, one of the very priciest in the United States, the average premium came to US$1,161, according to official U.S. sources. In rural Saskatchewan, where the provincially-owned insurer contributes no taxes to society and accident victims are woefully short-changed, the CAC discovered that premiums nevertheless average $800; across the border, where insurance company taxes provide millions to state coffers and accident victims receive full compensation, auto premiums cost little if anything more.
Comparisons among the many U.S. and the Canadian systems are rough because they reflect dozens of different state and provincial regulatory systems, different driving conditions, different methods of estimating rates, and, importantly, different philosophies. In the name of egalitarianism, for example, Canadian jurisdictions work hard at keeping dangerous drivers on the road. The government-mandated Facility Association operates in six provinces and three territories to provide a generous insurance pool – paid by inflating the rates of good drivers – for the sole purpose of providing insurance to drivers so reckless or incompetent that no private insurer would touch them. In August, Newfoundland announced reforms that include a 65% reduction in rates for young, single males, and a 43% reduction for 70-year-olds – both high-risk groups.
In many U.S. states, the regulatory system more often puts public safety first. In August, New York State increased rates by a whopping 19.7% – but only for the high-risk drivers that had been responsible for raising the rates of everyone. In Florida, insurance companies noticed several years ago that seniors become much greater risks after they turn 70, and began to raise rates accordingly. Earlier this year, an Insurance Institute for Highway Safety report found that those 85 and over have an almost identical rate of property-damage claims as drivers in the 16- to 19-year-old group, leading insurers across the country to begin to raise rates on this risky population.
“The statistics show that much-older drivers have accident rates that rival teenagers. So we have to charge a premium for the risk we are assuming,” said Robert Hartwig, chief economist for the Insurance Information Institute, a nonprofit research group for the insurance industry. Moreover, the trend to higher elder-rates will continue, U.S. researchers say, because the number of elderly people behind the wheel continues to grow. The state of Florida reported more than 200,000 drivers age 85 and older in 1999, a 48% increase over the number four years earlier.
The United States has also kept rates low by largely shunning “no-fault” insurance, an approach that many insurers lobby for in the belief it would raise their profits. In “no-fault” states, good drivers are forced to pay for the mistakes of bad drivers, allowing bad drivers to keep driving, or to drive more than they otherwise would. Statistics from the National Association of Insurance Commissioners show that “no-fault” states have the highest average car insurance premiums and that premiums in “no-fault” states rise nearly 25% faster than states with traditional car insurance. In the more accountable, low-cost states, high premiums force risky drivers to think twice about whether they belong behind the wheel of a car.
Safety aside, U.S. jurisdictions tend to provide better value for money because they better promote competition. The onerous regulations in the District of Columbia, historically one of America’s most expensive insurance jurisdictions, drove insurance companies away until the mid-1990s. Then the government introduced measures to promote competition. Insurers came back, choices in types of coverage increased and premiums dropped. Deregulation in the United States is also allowing new insurance products to take hold, such as the pay-per-mile approach favoured by many environmental groups. Car drivers insured under this scheme have an incentive to drive less and take public transit more: They are rewarded with insurance bills that are typically lower by about 25%.
While rates soar in Canada, they remain stable in the United States – up just 4.6% in 2001, the last year for which national figures are available, despite U.S. jury awards in recent years that are up 73% on average in auto liability cases.
Although the U.S. system promotes safety and accountability, and while competition there provides better value for money, almost no one in Canada argues for anything other than more state ownership or more state control. The Consumers Association of Canada – a misleadingly named organization that receives virtually no funding from the individual Canadian consumers that it claims to represent – rejects competition in favour of government ownership. Canada’s provincial premiers – four provinces already run government-owned systems – are little different: Most are committed to rate freezes or other measures that could force private insurers to leave. Even conservative Ralph Klein of Alberta plans to cut back auto insurance premiums while also capping insurance company profits. The local opposition cheers him on: “We’re strong supporters of free enterprise, but there’s times you have to intervene,” says Social Credit Leader Lavern Ahlstrom. “Insurance would be one of them.” The Insurance Bureau of Canada, in response, warns that its members may leave the province. Should they leave, competition would then weaken and rates would rise.
Public auto insurance, or an overly regulated private industry, makes for a great, short-term insurance policy for unprincipled politicians. The rest of us should steer clear of it.
Lawrence Solomon is executive director of Urban Renaissance Institute. www.urban.probeinternational.org, E-mail: LawrenceSolomon@nextcity.com.
He is also executive director of Consumer Policy Institute. www.c-p-i.org/cpi/index.html.