If you think about it in a certain way, insurance is one of the weirdest things people buy.
In the case of auto insurance, it’s mandatory for drivers to get it every year. Home insurance, while not required by law in the same way, is still something most property owners would never do without.
And yet for a product that is purchased so regularly, it is also pretty much useless most of the time. That is, people tend to make only a few claims during their lifespan, and some not at all.
Essentially, customers are obtaining an insurer’s promise to pay in those rare circumstances when something goes awry. As some of those insurers frame it, people are really purchasing peace of mind, allowing them to feel secure in owning assets that would otherwise be unaffordable to repair and replace.
That said, at a time of continued high inflation, a number of our Groundwork readers have told us they aren’t feeling that peaceful about their insurance rates these days.
In fact, several mentioned selling their cars or grounding them long term to save money. Some said they have put off buying a new vehicle, while others shared that they have reduced their coverage as much as possible.
When it comes to home and renter insurance, we were told of instances of significantly higher bills, fights over claims, and insurers demanding expensive upgrades to provide a reduction in rates.
Here are a few things worth noting.
• By most measures, Alberta has the third-highest auto insurance rates in Canada, though this is not new, and such comparisons don’t fully take into account the different facets of each provincial insurance system. For example, some provinces have public insurance, some rely on private insurers, and at least one has a mix.
• The latest annual report from the Alberta Automobile Insurance Rate Board (AAIRB) shows the average premium in Alberta increased 26 per cent between 2016 and 2020. This includes particularly big leaps in in 2019 and 2020, which, coincidentally or not, were the first two years after the UCP government removed a five-per-cent cap on annual rate hikes.
• So yes, auto insurance bills were clearly climbing for a while. However, over the last year, rates approved by the AAIRB have, on average, gone up just 0.04 per cent. Important to note is that approved rates are preliminary figures and will differ from the premiums that customers end up paying.
• As for home insurance, definitive numbers are harder to find, though there is no doubt average rates have grown — as much as 140 per cent in Alberta over the last decade, according to one rate aggregator. This includes a big escalation in 2021 and at least some forecasts suggest a further jump in 2022. Alberta appears to have some of the highest rates in Canada.
Inflation also affects insurers
A lot of factors go into rate setting, but the biggest driver tends to be the cost of claims insurers are paying out. And on that front, inflation is hitting the industry just as much as anyone else, said Aaron Sutherland, vice-president with the Insurance Bureau of Canada.
Ongoing supply issues with computer chips, for example, are a major expense in repairing and replacing vehicles, as are labor shortages and oil price spikes. Likewise, insurers have had to contend with increases in physiotherapy rates and other costs for treating injuries.
Many of the same factors apply to homes, especially when it comes to shortages of particular building materials.
Then there is the menace of climate change, which has provided a lot of headaches for risk management forecasters.
“We’ve had some bad years in terms of property losses from natural disasters … and that has put some upward pressure on rates,” said University of Calgary economist Anne Kleffner. “The good thing is that policies are one-year policies, so it gives insurers an opportunity to learn as they go.”
Can anything be done to rein in costs?
On a consumer level, there are, of course, a number of changes people can make to their homes, vehicles and lifestyles that can affect rates (get a smaller vehicle, drive less, install safety upgrades, etc.). And it is valuable to shop around each year since companies compete with each other.
“One thing insurers can be better at is helping property owners learn the things they can do they can reduce their own risk from wildfires or whatever,” Kleffner said. “Insurers are a natural conduit of that kind of information.”
Still, arguments bound that changes are needed at the regulatory level.
This includes the aforementioned NDP Opposition, which has called for the reinstatement of that five-per-cent cap on auto insurance rates, and also recently demanded a one-year rate freeze. A number of our Groundwork readers have suggested the same thing.
As part of their policy justification, the NDP has framed insurer profits as an indicator that rates have been too high. Again, there are a few things to consider.
• Though I am no apologist for the insurance industry, some degree of profitability is necessary in a system that relies on corporate providers. The real question is at what point profitability becomes unreasonable.
(It should be noted insurers make profit from investment income and other sources, not just premiums).
• By law, auto insurers are allowed no more than a seven-per-cent profit provision when they submit rates for approval — and mostly they propose rates short of that, Sutherland said. This limit applies only to approved rates, so companies can still post year-end returns greater than seven per cent. However, after a particularly profitable year or two, Sutherland said insurers are likely to face difficulty getting approval for another significant increase.
• A rate cap may provide short-term relief, but it could also produce situations in which insurers cannot cover their costs. Potentially this could push some players out of the market. Companies will also find other ways to compensate, perhaps by reducing service levels, reducing discounts or increasing home insurance rates. There are a number of levers they have to boost their bottom line.
Other ideas worth considering
Another suggestion from Groundwork readers is for Alberta to go the way of BC, Saskatchewan, Manitoba and Quebec by having the government fully or partially take over the auto insurance system.
This is worth considering, though every expert I spoke with warned this won’t necessarily lead to lower rates. BC, which has a public system, has the highest average rates in the country.
The other approach is to find ways to reduce payout costs. For example, lowering speed limits and doing more enforcement could lead to fewer severe collisions. You could see investments in safer road design, incentives to get people cycling or taking transit, or new rules requiring winter tires.
Governments have additionally taken steps to rein in claim amounts for pain, suffering and injury, though this can get controversial.
As for home insurance, rates could be affected by rules limiting development in wildfire areas and flood plains, or by altering building code provisions to reduce risk (though this could also reduce housing affordability). We could also consider incentive programs for home safety upgrades, like hail-resistant roofs.
There are plenty of other ideas out there, including incentivizing more insurer competition, expanding the reinsurance market (insurance for insurers), or encouraging more co-operative insurance. But I have run out of space, so I urge readers to do their own research.
At the end of the day, this is a complex industry with a lot of moving parts. Consumers do have options to try to reduce their bills, but companies will only do so much at a time of great inflationary pressure.
For the province, a rate cap is probably the easiest intervention and could have benefits over the short term. However, I am more skeptical of its value over the long term, as compared to interventions to influence payouts. It’s a fascinating debate, and I look forward to your comments.