Short-Sighted Mathematics

Private auto insurers’ claims costs have increased demonstrably over the past few years in both Alberta and Ontario. It therefore seems axiomatic — as obvious as saying “two plus two equals four” — that insurers must raise their rates.

All the more puzzling, then, why the Alberta Automobile Insurance Rate Board (AIRB) recently signed off on a 5% decrease in the province’s auto insurance rates, effective November 2009. The decision is “curioser and curioser,” as Alice would say in Wonderland, because when it was made, the Alberta courts had just flip-flopped on the constitutionality of the province’s Cdn$4,000 cap on minor injuries.

Yes, as the AIRB stated publicly in its decision, the Alberta Court of Appeal did restore the cap. This no doubt results in greater certainty for insurers about their claims costs; this, in turn, establishes the terrain for rate decreases (or at least, more forgiving rate increases).

But the “greater cost certainty” arising form the most recent Alberta cap decision is illusory. Virtually everyone in the insurance industry knew the Alberta Court of Appeal decision would be further appealed to the Supreme Court of Canada. Indeed, the AIRB made its decision on rates known a mere seven days after plaintiffs’ counsel advised the press they would be seeking leave to appeal the decision to restore the cap to the Supreme Court of Canada.

And so now the province’s auto insurance industry remains in a state of confusion about the status of the cap. Only this time, it is stuck with a rate decrease, which is in no way justified by the claims numbers.

The Insurance Bureau of Canada (IBC) asked for a 6% rate increase if the cap were to be restored. The board said it had “considered the claims increase of insurers” in its decision, but it is unclear whether that situation was ignored, since the rate board ultimately went with the estimates provided by its own actuaries instead.

This is a clear-cut case of politics interfering with the natural order of the private auto insurance universe. Unfortunately, what’s shaping up right now will probably play out in the media as a confrontation between insurers and the public over auto rates.

In fact, this has already happened in Ontario. As of press time, it appears a very public protest by the medical-rehab community has caused the province’s finance minister to delay his decision concerning reform to Ontario’s auto insurance product. Basically, the medrehab community wants the finance minister to reject a recommendation that would reduce the mandatory medical and rehabilitation benefits for non-catastrophic claims from Cdn$100,000 to Cdn$25,000 (converting the Cdn$100,000 coverage into an optional benefit instead) — a move that meets with wide approval among people in Ontario’s auto insurance industry.

Alas, the spectre of public discontent with auto insurance rate increases is overshadowing the major — and negative — role political expediency is playing in this debate. Even though the industry’s financial numbers say “two plus two equals four” and rates must be increased to make up for claims costs, politicians and regulators, ever mindful of public clamoring each and every time insurance rates go up, are saying “sometimes it’s three, sometimes five” — whatever it takes to keep potential voters happy.

Trouble is, what keeps the public happy today will not keep it happy tomorrow. Insurers want to decrease premiums, too, but they can’t do it if they will go bankrupt in the process. The financial reality is this: if insurers’ rate increases continue to be too modest — or supplanted by politically expedient decreases — the need to increase rate will only become more acute as claims costs continue to escalate in the future.

The worst-case scenario for the public would be for insurers to cut their losses and bail out of writing an unprofitable product. Then what will the politicians do to make the public happy?

If there was ever any a time not to succumb to the temptations of political expediency, now is that time. Now is the time to remember that two plus two does indeed equal four.

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‘How can I help seeing what is in front of my eyes? Two and two are four.’

‘Sometimes, Winston. Sometimes they are five. Sometimes they are three. Sometimes they are all of them at once. You must try harder. It is not easy to become sane.’

George Orwell, 1984