Property and casualty (P&C) insurance premiums in Canada are higher than in other G7 or OECD countries. This disparity, however, is not attributed to insurers but rather to government intervention at various levels, according to a study published by the C.D. Howe Institute.
Conducted by Alister Campbell, a senior fellow at the Institute, the study updates an earlier comparative analysis released in 2021. Entitled The High Price of Prudence—Benchmarking Canada’s Property and Casualty Industry, the study reveals that Canadians pay more than consumers in other developed nations to insure their property and belongings.
The first edition of the study focused on average premiums paid during the 2015–2018 period. The updated version includes data for 2020–2022, with specific figures for 2022.
To compare countries, the study uses gross domestic product (GDP) to assess the value of premiums paid. The Organisation for Economic Co-operation and Development (OECD) uses the ratio of gross written premiums to GDP as a measure of insurance penetration in domestic economies. The study looks at all types of insurance not related to life insurance (“non-life insurance”).
In 2022, gross written premiums from Canada’s P&C insurers for personal and commercial property coverage amounted to 1.23 per cent of GDP. By contrast, the average for other G7 countries was 0.66 per cent of GDP, and the OECD average stood at 0.52 per cent.
For 2020–2022, gross written premiums in Canada’s auto, property, and liability insurance sectors averaged 3.2 per cent of GDP. This is notably higher than the OECD average of 1.5 per cent and the G7 average of 2.2 per cent (excluding Canada). These figures indicate that Canadian premiums are slightly higher than in the United States and significantly higher than in other G7 and OECD countries.
A Canadian exception
The study highlights several factors that make Canada an exception among developed nations. For instance, the Office of the Superintendent of Financial Institutions (OSFI) imposes higher capital requirements on insurers to ensure solvency. This, combined with the lack of government mechanisms to share the costs of catastrophic events—such as earthquakes, floods, and wildfires—has driven capital requirements even higher.
When it comes to auto insurance, Canada also stands out. Including premiums paid by businesses, auto insurance premiums account for the largest share of GDP in Canada compared to other countries. The study notes significant provincial variations in auto insurance systems, reflecting differing compensation frameworks.
In home insurance, the report emphasizes the need for national-scale solutions and public-private partnerships to address the growing risks and costs associated with climate-related disasters, which are escalating at an alarming rate.
“Major losses in mid-2024 serve to remind us all that the profits in good years are required to fund cover losses in (very) bad years,” the study states. “Over the combined study period, the Canadian industry still generates subpar returns relative to the benchmark comparators in other developed economies.”
Main findings
Alister Campbell outlines five main findings from his study update:
- Canadian consumers still pay higher-than-average risk transfer premiums relative to the benchmark in comparable lines of business, with rates rising since the previous study. This trend is especially pronounced for both property and auto lines of business.
- Canada’s highly competitive commercial insurance market maintains pricing aligned with that of G7 and other international peers. Commercial liability insurance rates are not a contributing factor to Canada’s higher-than-average costs for risk transfer.
- Analysis by province reveals additional areas of focus and interest, particularly in auto insurance. For example, British Columbia’s no-fault reforms have led to swift and substantial benefits. However, in provinces like Manitoba, Saskatchewan, and Alberta, premiums remain higher than average, significantly contributing to Canada’s elevated auto insurance costs. The study suggests Canadians may receive higher accident benefits than citizens in many other countries. Additionally, a greater portion of total costs for treatment of bodily injury is borne by P&C insurers rather than public health coverage elsewhere.
- Ontario could reduce costs by better controlling claim fraud and auto theft. Provinces with government-run monopolies in auto insurance could benefit from introducing market competition.
- Property insurance premiums are more consistent province-by-province but remain high compared to OECD averages. Alberta, for instance, has seen substantial catastrophic events in the last decade and premiums are correspondingly high (and climbing). The higher average property premiums paid by consumers and businesses almost across the board cry out for more holistic solutions, such as establishing public-private partnerships to address tail risk.
Challenges in international comparisons
The study also acknowledges the difficulties of conducting international comparisons. “Using total premiums for benchmarking is problematic because different jurisdictions rely on the private versus public sectors to varying degrees for risk transfer,” it explains.
For example, Campbell notes that the U.S. is an outlier. “Higher U.S. premiums include entire sectors of activity that are handled by the public sector in Canada, such as workers’ compensation and crop insurance.”
“For this reason—in both the initial study and this update—we have focused our analysis on comparable sectors (commercial liability, property, and auto insurance),” Campbell explains.
Data limitations in Canada
Campbell points out that a lack of comprehensive data in Canada hampers comparisons with other OECD countries. For his study, he relied on figures from the Insurance Bureau of Canada to calculate metrics such as the claims expense ratio and loss ratio, which together form the combined ratio used to measure premium efficiency.
On these metrics, Canada fares poorly compared to other OECD countries. The claims expense ratio for Canada’s P&C industry is 32 per cent, slightly above the OECD average of 30.7 per cent.
Operating costs are largely driven by distribution expenses. The study notes that Canada’s distribution model has a materially higher share of independent brokerage distribution in personal lines than in many, if not most developed economies. However, Campbell clarifies that Canadians’ preference for broker advice is not a major driver of overall differences in premiums.
As for the loss ratio, most insurers worldwide aim for a range between 60 and 65 per cent. From 2015–2018, Canada barely met this target, with a loss ratio of 64.9 per cent. During the 2020–2022 period, however, the loss ratio improved significantly due to pandemic-related restrictions, which reduced claim frequency. Coupled with premium increases, these factors helped Canadian insurers lower their loss ratio during this period.
Profitability still below average
Higher premiums do not necessarily translate to higher profitability for Canadian insurers. With a loss ratio in line with global averages and a higher-than-average claims expense ratio, Canada’s P&C insurers fail to rank among the top performers internationally. Return on equity for Canadian insurers remains below the OECD average.
The study also highlights that Canada’s insurance market is relatively competitive. In 2022, the top 20 P&C insurers accounted for 83.4 per cent of the market. The Herfindahl-Hirschman Index for Canada was 638.2, well below the 1,500 threshold that signals moderate market concentration and far from the 2,500 threshold for high concentration.
“The long-ago promises and repeatedly postponed initiative to develop a better liquidity backstop for earthquake risk (addressing a significant risk in both Western and Central Canada) is now long overdue. All Canadians are experiencing a higher cost of living because of this failure to execute,” Campbell concludes.
Alister Campbell is also the CEO of the Property and Casualty Insurance Compensation Corporation (PACICC). However, the C.D. Howe Institute clarified to Insurance Portal that this study is entirely independent of PACICC and solely reflects Campbell’s expertise as a senior fellow and researcher.
