A new report sympathetic to the position that auto insurers find themselves in when it comes to auto insurance rate setting in certain provinces – such as Alberta, Ontario and the Atlantic provinces – finds that rigid rate regimes often prevent insurers from setting appropriate prices, ultimately creating challenges for insurers in need of greater agility in the face of growing risks.
“Unlike many other industries, including other lines of property and casualty (P&C) insurance, auto insurance is mandatory by law. This compulsory nature is where one gets the idea for pricing regulation,” say the authors of a recent C.D. Howe Institute report, The Price of Over-Regulation: Assessing the Impact of Rate Controls on Auto Insurance Market Flexibility in Canada. “Automobile insurance regulation is looking to walk a fine line: ensure pricing is reasonable for the consumer, while allowing insurers to respond to economic conditions.”
The paper looks at four regulatory archetypes and where they are being used throughout the country and also provides a brief overview of regulatory systems from other jurisdictions around the world.
Volatile market conditions
“My results show that in Canada, insurers operating in provinces with stricter rate regulation tend to be less responsive to increases in claims and losses. This reduced flexibility is particularly concerning given the rising frequency and severity of major economic shocks and extreme weather events which directly affect auto insurance claims and losses,” they add, warning that insurers who cannot adjust premiums in response to shocks could ultimately exit the market. “My findings suggest that Canadian regulatory regimes should evolve toward more flexible pricing frameworks that allow insurers to better manage risk in a dynamic environment.”
Stricter price controls restricting insurers’ ability to adjust premiums in response to changing risks, they add, is a limitation which could compromise insurers’ financial resilience in the long run, all while market conditions become increasingly volatile.
“From a policy perspective, this study highlights the importance of striking the right balance between consumer affordability for a mandated product and the need to ensure insurer solvency and market dynamism,” the paper concludes. “While the first goal might be more popular and might seem more pressing from a political perspective, the results indicate that neglecting the latter paradoxically leads to harmful consequences for the former.”
