Robbing Peter to Pay Paul?

B.C. announced in its March 2010 budget an estimated transfer of $777 million over three years from the public auto insurer, the Insurance Corporation of B.C. (ICBC), to the provincial government coffers.

This kind of transfer is unprecedented in B.C. and elicited howls of outrage in the media by the government’s opposition critics, who portrayed the move as an attempt by the province to raid the public insurer’s piggy bank.

Both the ICBC and the government, however, see this move as a way to transfer surplus capital from the public insurer in a manner that won’t see the ICBC undermine the private market for optional auto insurance rates.

ICBC is a Crown corporation that provides auto insurance for all B.C. motorists. It offers a minimum Basic Autoplan coverage, available only from ICBC, which includes up to $150,000 in accident benefits and up to $200,000 for damages claimed by other drivers. In addition, ICBC competes with private insurers on Optional Extended coverage, including collision repair and comprehensive coverage if the vehicle is stolen or vandalized.

Just prior to the financial crisis in 2008-09, ICBC says it started to accumulate excess capital for a rainy day. “ICBC has only recently accumulated more Optional capital than is required,” Mark Jan Vrem, ICBC’s manager of media relations, explained in an email to Canadian Underwriter. “At the end of 2007, capital on the optional side of the business reached levels that were sufficient to meet our regulatory requirements, protect customers from unexpected events and volatile rates, and to reinvest in the business. Given the volatile financial marketplace of the last two years, this capital was retained in the company to protect our customers.”

But with the market crisis passed, the Province of B.C. saw no reason for ICBC to maintain the excess Optional capital. In its budget, it called for ICBC to transfer $487-million to the provincial government coffers in 2010, $144-million in 2011 and $146-million in 2012.The government’s March 2010 budget and fiscal plan states: “ICBC’s financial performance since the current regulatory framework was put into place in 2002/03 has resulted in the corporation being well capitalized in both its Basic and Optional insurance lines of business as measured according to the guideline set by the federal government’s regulator of insurance companies. Basic insurance capitalization is the purview of the BC Utilities Commission, which set rates for compulsory vehicle insurance. However, in proposed changes to ICBC’s legislation, government will reinforce the application of the federal guideline to ICBC’s Optional insurance capitalization to ensure ICBC operates in a manner similar to private insurance companies in a competitive marketplace. Income from this line of business that is not required to maintain sufficient capital to meet the federal guideline will be remitted to the CRF in support of core government services.”

When the government announced its intention, the Opposition roared in the legislature. NDP MLA Bruce Ralston, the opposition critic for finance, questioned the move to limit the insurers’ cash reserves during Mar. 4 Question Period. “Why doesn’t the minister leave it to the ICBC board of directors to make the decision how large their cash reserves should be, rather than by enshrining it in legislation and forcing them to transfer it to the government’s books?” Another critic, MLA Mike Farnsworth, said the move would not allow ICBC to provide its customers with potential premium reductions. “With this $780 million unprecedented cash grab, they are taking away the opportunity to reduce optional coverage and other coverage even further,” Farnsworth said.

The dilemma for the government is that it did not want ICBC to use its surplus capital to undercut rates offered by private insurers in the province’s optional insurance marketplace. As it stands, over the past five years, ICBC’s optional rates have gone down by 17% and its basic rates have not increased in three of the last five years. Transferring the excess capital to the government’s coffers was one to ensure ICBC’s rates remained competitive with private insurers’ rates in the Optional insurance marketplace.

Certainly the transfer wasn’t in danger of making consumers’ rates increase, ICBC said in a statement to Canadian Underwriter. “The terms of the transfer ensures enough capital is kept within the company to meet our regulatory requirements, protect our customers and reinvest in our business,” Vrem noted, adding further that there would be “no direct impact on rates, which are mainly driven by claims costs.”

Industry observers note that although this kind of public insurer-to-government transfer is novel in B.C., it is not without precedent in Canada. Saskatchewan’s public insurer, SGI Canada, has paid a dividend to the province for many years and says it will continue to do so. “This dividend that SGI Canada pays each year is based on a percentage of our profit and is dependent on a number of factors, such as the level of capitalization of the organization, needs of the shareholder, future capital requirements, etc.,” says Tim Kydd, assistant vice president of communications at SGI. The payment of dividends is based on a policy decision by SGI’s shareholder, the Province of Saskatchewan. SGI Canada paid out a special dividend of $22 million in 2000 as a result of having excess capital at that time.

But the Saskatchewan example is different from B.C. in many ways. Chief among them, in Saskatchewan, the money is not coming from the arm of SGI that writes basic auto insurance. SGI’s public insurer is made up of two distinct entities. On the one hand, SGI Canada is fully competitive, selling property and casualty insurance products such as home, farm, business and extension auto in seven Canadian provinces. The Saskatchewan Auto Fund, on the other hand, is the province’s compulsory auto insurance program, operating the driver’s licensing and vehicle registration system. “The Auto Fund is designed to be financially self-sustaining over time,” says Kydd. “It does not receive money from, nor pay dividends to, the provincial government.

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The dilemma for the government is that it did not want ICBC to use its surplus capital to undercut rates offered by private insurers in the province’s optional insurance marketplace.