Car-insurance rates hit calamity heights.

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Author: Stock, Peter

Section: Economics

Finance

Car-insurance rates hit calamity heights

The courts, terrorists and other costs hammer insurers and insured alike

Like most Albertans, Barb Bradley is unhappy about across-the-board jumps in auto-insurance premiums over the past year. Her son Jean, for example, experienced a 33% increase to $200 a month, even though the 20-year-old University of Calgary undergraduate has no tickets and no accidents. And he is lucky to be on his mother's plan. An 18-year-old male with a clean record plus a driver's education course, applying independently, pays about $650 a month for minimum coverage. Mrs. Bradley laments, "It seems unfair to young people to assume they're all bad drivers."

Not only are insurance rates rocketing upward for all drivers, but insurance providers are pulling back from writing new auto business in provinces with free-market oriented regulations--Ontario, Atlantic Canada and Alberta. Insurers have applied for high-risk premium jumps of 61.2% in New Brunswick, 41.3% in Newfoundland and 31.4% in Nova Scotia. Royal & SunAlliance is reducing its auto exposure in Ontario and the Maritimes. On what new business it does accept, the British-headquartered company will demand higher prices and stiffer terms. In Alberta, The Co-operators, Economical and Allstate have declined to take on new auto customers under their normal rate structure, although their high-risk divisions will sometimes sign up newbies at sky-high premiums.

'Every young person is going to have one accident.'

The Insurance Brokers Association of Canada says that, during 2001, auto insurers in Alberta paid out $108 in claims for every $100 collected in premiums--an outright loss. Setting insurance rates, a mind-wrenchingly complex task, is being driven nowadays by higher court-set awards for injuries, rising health costs, higher auto-repair bills and world-scale calamities, notably the destruction of the World Trade Center by Islamist terrorists. Hardest hit of all by the overall increases have been males under 25, but drivers over 65 are coming increasingly into insurers' sights as another high-risk group.

"It averages out that every young person is going to have one accident," observes Steve Shuman, an independent broker from Camrose, Alta. "For every young person who goes accident-free, there is another who will have two or more accidents." This veteran insurer says young drivers have only faced the same percentage increase in rates as everyone else. "When you apply a 20% rate increase to an already-high premium, it makes the increase seem larger."

Mr. Shuman, with 42 years in the business, reports that the number of insurance claims has not risen. Rather, the problem is an increase in the average value of settlements. "Where a claim for whiplash might have been settled for one or two thousand dollars a few years ago," Mr. Shuman says, "we're now paying out seven to eight thousand. That's what the courts have awarded." Co-operators spokeswoman Dominique O'Rourke says, "During 2001 we increased premiums 2%, and in 2002 we increased them 22%. Yet over that time period, we've seen claims increase 38%. Our costs are up for everything, including auto glass, towing, litigation costs, healthcare costs, especially for soft-tissue injury or whiplash."

The Co-operators, which insures 8.6% of Alberta drivers, lost $3.4 million in its most recent quarter. Claims expenses are currently 9% higher than its earnings from premiums. Industry-wide, Mr. Shuman comments, there is another problem. "Usually, the insurers are happy to make their money on their investments and break even on their policies. But their investments have dropped with the stock market." And on top of that comes re-insurance. These are the premiums paid by insurers themselves to protect their finances from large-scale catastrophes like the multibillion-dollar destruction at the World Trade Center. Re-insurance expense is certainly a factor in the recent consumer premium increases, says Harold Baker, executive director of the Independent Insurance Brokers Association of Alberta.

Insurance rates are regulated by provincial governments. Remedies to control premium costs available to regulators include capping damages and instituting no-fault accident rules, thus guiding the courts toward lower settlements. More effective enforcement of criminal and traffic laws would help, too. Alberta New Democrat MLA Brian Mason is urging consideration of a provincial takeover of the basic auto-insurance business, following the lead of B.C. and Saskatchewan. Alberta Premier Ralph Klein says his government will give full consideration to the issue.

Diane Strashok, president of Edmonton-based Peace Hills General, told Thompson's Insurance News that the industry had better figure out how to accommodate customers. "They [the Alberta government] are getting calls from insureds saying companies won't write them because they have had a lapse in coverage or had one NSF cheque, or whatever," Ms. Strashok says. Unless insurers can come up with some solution besides sticking all new clients into very costly high-risk categories, she warns, further government intrusions are a real possibility.

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By Peter Stock

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