Presentation to Select Committee on Public Automobile Insurance (The Weir Committee)

Lawrence Solomon
November 12/2003

At this hearing, my foundation has two road-related goals in any coming reforms in auto insurance: To promote public safety and financial soundness. Both of these goals depend on one factor: strict accountability.

Fredericton, New Brunswick, November 12, 2003

Thank you, Mme. Chair, for the opportunity to address this Select Committee. I appreciate your courtesy in accommodating my request to appear, so late in the hearing. You are charged with a very important responsibility, and I will attempt to be of assistance to you and your fellow members.

Let me first introduce myself and tell you a little bit about my organization. I am Managing Director of Energy Probe Research Foundation, one of Canada’s largest consumer and environmental organizations, and Executive Director of its Consumer Policy Institute division. You know our foundation best, perhaps, because of Energy Probe’s work on Pt. Lepreau and NB Power. I know that you and my colleague at Energy Probe, Tom Adams, have had a productive relationship over the years and for that we have been extremely appreciative.

As you and other members may know, our foundation runs a wide variety of programs. In most programs, our work involves strengthening regulation by removing the conflicts of interest that prevent government from policing industry. Basically, we believe that government and industry should not be in bed with each other, but must operate at arms length from each other.

We have some 30,000 financial supporters across Canada, about 400 of them in New Brunswick. Our foundation’s family of Web sites draw a great deal of traffic from members of the public who come to us for our perspective. We receive approximately 30,000 hits per day, which may makes our sites Canada’s most heavily travelled consumer and environment sites.

Ordinary Canadians represent the single largest source of our foundation’s funding, through small charitable donations that average about $40. We receive very little in the way of grants from either governments, corporations or unions – these three sources combined amount to about 2% of our funding.

In the 25 years since I helped found Energy Probe, insurance companies have never provided a grant to us, or a payment of any kind. This trip to New Brunswick is an exception. The Insurance Bureau of Canada is paying for my expenses and my time. The Insurance Bureau contacted me after seeing my recent series of articles on automobile insurance in the National Post, where I am a columnist, and asked me if I would agree to come here on short notice to express my point of view to a group at a luncheon. I agreed, on condition that I be paid. I also requested that the Insurance Bureau attempt to arrange that I šppear before you, and I am grateful that it agreed to do so, and that you have agreed to hear me.

My foundation has been involved in insurance issues for a quarter of a century now, mostly in the area of nuclear power, brownfields, political risk insurance related to our Third World work, and of, course, road safety. We see the insurance function as a cornerstone of a democratic society like Canada that operates in a market economy, because the insurance industry is, essentially, a regulator of risky behaviour. In the case of risky behaviour by large industries – multinationals that destroy the Third World’s forests, for example, or the nuclear industry – the private insurers have historically acted to rein in bad behaviour, much to the chagrin of the multinationals. In the case of auto insurance, the private insurers act to rein in risky behaviour by inexperienced youths, or the elderly who are beginning to lose some of their alertness, or drunks.

A male teenager doesn’t want to believe that he represents a greater risk on the road today than he will represent when he’s 25 or 30 years; a 75- or 80-year-old woman doesn’t want to believe that she isn’t as alert, or her reflexes aren’t as quick, as when she was 50 or 60. No one wants to pay more for the privilege of driving because an insurer tells them they’re likelier to get into an accident.

At this hearing, my foundation has two road-related goals in any coming reforms in auto insurance: To promote public safety and financial soundness. Both of these goals depend on one factor: strict accountability.

When other jurisdictions moved to public insurance, or away from systems that stress full accountability, the death rate immediately went up, typically between 5% and 10%. In Quebec under a no-fault system, according to a University of Toronto study, it climbed by almost 10% within a decade. In B.C., which has a tort system but not a system to actuarially determine price, an extra 140 people a year die, according to an IBC study.1 Similar findings have been found for various U.S. jurisdictions and an Australian jurisdiction, and in New Zealand, which saw a 16% increase in fatalities after its switch to public insurance in 1972.

If New Brunswick moves toward a public system, the legislature should be careful to minimize the loss of life that will almost surely accompany this move. I believe a determined province could do much better than other jurisdictions have done but courage and integrity would be required. To avoid needless loss of life, politicians would need to stand up to seniors and youths – the same groups that now complain that private insurers are discriminating against them.

Private companies have a strong incentive to stand up to the lobbies – they have the profit motive. In some cases, the profit motive does harm. In the case of insurance, the profit motive helps the insurer resist calls to let dangerous drivers on the road.

This is the challenge in a public insurance system: In a system that decides rates politically, it takes great courage for politicians to tell their constituents that they are risky drivers. But if they don’t level with their constituents, innocents will die.

The record to date is not good. Politicians are human, and they succumb to special interest groups. No public insurance system I’m aware of has performed as well as private tort systems that are faithful to actuarially based premiums.

Let me provide some statistics from the OECD, which compares death rates among various countries. I have shown the English-speaking nations in blue bands. As you can see, these countries tend to outperform the rest of the world. The reason, it is widely accepted, is the British system of torts and strict liability, and market-determined pricing. The British system is one which Canada, the U.S., Australia and New Zealand inherited. These legal and economic traditions have served us well. Please refer the Road Fatalities in Selected Countries (2001) chart at: [Adobe Acrobat format]

The UK, which has remained truest to insurance principles, has an especially low death rate. The UK doesn’t have an equivalent to our Facility Association that keeps poor drivers on the road at the expense of good drivers. In the UK, drivers are most accountable because they face premiums the reflect the true costs that they foist on society.

Canada and the U.S., which have some jurisdictions that have strayed far from the strict accountability we see in the UK, do well but less so. The worst of the English common-law nations is New Zealand, which abandoned accountability for a fully public system..

Countries that do not have a common law system like that of the English-speaking nations tend to do poorly compared to us, as you can see in the chart. If we abandon our legal and economic traditions in auto insurance, and the accountability that accompanies them, we will need other accountability mechanisms.

I suggest that any public system that New Brunswick adopts build in iron-clad mechanisms to minimize the loss of accountability in a move to public insurance. For example, if the death rate increases, the minister in charge and the responsible deputy ministers should face penalties, perhaps they should be forced to resign, or have significant pay cuts. To show that New Brunswick is serious about minimizing the loss of life that typically accompanies public insurance, these penalties should be legislated, and be a litmus test of responsible government.

More is needed, too. Generally, when governments operate businesses, they are held to a lower standard than the private sector. For example, it is much easier to prosecute a CEO whose reckless policies lead to loss of life than a government minister, or government employees, who can claim to be merely following government policy. New Brunswick shouldn’t tolerate this double standard, particularly when we are dealing with public safety. I recommend that any public system of auto insurance hold government workers, and elected officials, to the same standard that would apply to a counterpart in the private-sector. By making the operators of a public system fully liable for policies that lead to loss of life, including criminally liability should it come to that, we are less likely to see politicians succumb to pressure from the electorate. If the elected officials and the bureaucracy do not become fully liable, then I fear that nothing will prevent carnage on New Brunswick’s roads.

As an additional measure to ensure accountability, the public insurer must be open and transparent. As you may be aware, the insurers in provinces with public insurance tend to be secretive, a secrecy often justified on grounds of commercial need. A public, non-profit monopoly insurer has no need to retain secrets on the basis of commercial need. This policy of secrecy is subject to abuse – in the hands of some politicians, it can aid a coverup. New Brunswick, if it adopts a public system, should set a precedent by having a fully accountable automobile insurer with a fully transparent system, in which all relevant information is available through Access to Information Laws, and all rate setting criteria and rate information, as well as detailed accident and fatality statistics, are posted on a publicly accessible Web site.

Safety issues aside, my foundation has concerns about the financial impact of going to a public insurance system. One factor is the high start-up costs. As you know, the Bob Rae government in Ontario was elected on a promise to bring in public auto insurance but then decided against it after discovering it was unaffordable. A smaller province would have even more difficulty. No province, in fact, has adopted a public system since the 1970s, when BC, Manitoba and Quebec went public. No other Canadian province has gone public in the last quarter of a century. No other country has done it since New Zealand in 1972. No U.S. state has public insurance. Outside Canada, no western jurisdiction that I’m aware of, in fact, is considering public insurance. The experiment of the 1970s simply did not catch on anywhere.

If there is any trend, it is toward a return to more accountable traditional insurance systems. Several U.S. states abandoned no-fault and went back to a tort system. The Saskatchewan Party, which came within two seats of forming a government in the recent elections, has vowed to move to a tort system. Quebec’s new Liberal government has been looking into it. BC’s Liberal government is considering opening up BC auto insurance market to the private sector. A recent national poll found that Canadians who have public insurance want to go back to private insurance. This is the same poll that found Canadians in provinces with private insurance want to switch to public insurance. Providing insurance is a thankless task, whether it is the government or the private sector that is providing it.

My foundation has another concern, as well. We are strong backers of a single payer, publicly funded health care system. Public auto insurance can potentially harm public medicare in two ways. One, the additional casualties will increase health care costs at a time that the health care system is under attack. This could require more funding, giving opponents of publicly funded healthcare a club to wield. At the same time, quite apart from the one-time costs of going public, the province would lose substantial tax revenues on an on-going basis from the loss of this industry, which is a substantial taxpayer. Because health care is by far the biggest provincial expense – 35% in New Brunswick, almost 40% in the other provinces, and growing fast in all provinces – enormous additional pressure will be put on our health care system. Across Canada, provinces are grappling with the difficult choice of whether to cut existing programs in order to save medicare. New Brunswick’s challenge will be all the more difficult if you try to rescue medicare while at the same time swallowing one of the province’s largest industries. For this reason I recommend that any public system not short-change taxpayers. The premiums charged by the public health insurance system should thus be sufficient to pay for the capital costs of start up, and sufficient to pay a dividend to the provincial purse equivalent to the taxes that the private industry would have been paying.

Those are my prepared remarks, Madam Chair and members of the Select Committee. If you have any questions, I will be pleased to answer them.

1 Kovacs, Paul and Leadbetter, Darrell, “The Influence of the Social Pricing of Insurance on Road Safety in British Columbia.” Insurance Bureau of Canada. June 2003.

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