Conditioned Response

If Alberta’s auto insurance regulator really wants to save Alberta taxpayers money, it should stop paying actuaries to make recommendations on industry-wide auto rate adjustments, because the regulator routinely ignores their advice anyway.

For the second year in a row, Alberta’s rate regulator decided to play Santa Claus and give the province’s consumers a 5% rate decrease on mandatory auto insurance rates. This is the second time in a row the regulator has ordered a 5% decrease against the advice of its own actuary, Oliver Wyman.

Watching Alberta’s regulator trying to please auto insurance consumers in the province by offering unjustified lower rates each year is as predictable as watching the mouse go after the cheese in the maze. God forbid the cheese might be guarded by electrical “sticker shock” one of these days.

Let’s look at the track record:

Three years ago, in 2008, when the province’s $4,000 cap on minor injuries was found to be unconstitutional, Oliver Wyman called for an industry-wide auto insurance rate increase of 14%. In response, Alberta ordered a 5% industry-wide rate increase.

In 2009, when Alberta’s Court of Appeal found the minor injury cap to be constitutional after all, Oliver Wyman called for a 3% rate decrease. In response, the Alberta Automobile Insurance Rate Board (AIRB) ordered a 5% auto insurance rate decrease.

In 2010, Oliver Wyman called for auto insurance rates to remain flat at 0%. In response, the AIRB ordered a 5% auto rate decrease.

Keep in mind that over the past three years, AIRB’s actuary has generally painted a rosier picture than the insurance industry in terms of rate requirement. Two years ago, for example, when the minor injury cap was found to be unconstitutional, the Insurance Bureau of Canada (IBC) called for a 36.7% rate increase. One year ago, in 2009, when the cap was once again restored, IBC called for a 6% rate increase.

But insurers can’t seem to win even when their advice is the same as that of the government’s actuary. In 2010, IBC’s submission on rate was the same as that of Oliver Wyman, which called for no rate adjustment (0%) in 2010. And yet, the province ordered a 5% decrease.

So really, other than providing a baseline from which to deduct an additional 2% to 9% from the industry-wide rates, is there much point for the province to hire actuaries?

Oh sure, the province’s consumers will be happy they are paying lower rates — in the short term. But at some point, this political suppression of rates is going to lead to an untenable situation of the type we see in Ontario right now.

Ontario auto insurers failed to take enough rate over the past three years, even as they were absorbing increasing accident benefits claims costs. Finally, their money flowed outwards faster than their income flowed inwards, and suddenly Ontario insurers found themselves paying at least one-and-a-half times more money in accident benefits claims than they were collecting in premium.

The upshot of that was a predictable market correction. Insurers started charging more premium, boosting their rates by an average of about 5.5% in 2008 and 8.8% in 2009.

We are witnessing the political fallout from this, in the form of much-needed auto insurance reforms in the province, based on consumers’ complaints about rising insurance costs.

It is not difficult to see this happening in Alberta sometime over the next three years. Alberta has been suppressing rates against the advice of the industry and its own actuaries for some time now; you can see the need for a market correction coming as a result. And when it does, Alberta will be facing the same political backlash over rates that it has been trying to avoid through suppressing them in the short term.

At that point, the province’s actuary will be well positioned to say to the regulator: ‘We told you so.’

Not that it matters what the actuaries think, right?