Auto Insurance in Canada

Car Insurance

MYTH: When I’m injured in a car accident, all my medical expenses are paid for by my government provincial health plan.
FACT: Car insurers pay out more for medical rehabilitation costs in Canada than do government health insurance plans, workers’ compensation plans or private health care plans combined.

Helping you return to health if you are in a car collision is one of the most important things car insurers do. Every year, car insurers pay at least $2 billion for the medical rehabilitation of injured Canadians. Insurers pay in three ways:

* Through the Accident Benefits portion of car insurance policies. Accident benefits (or no-fault benefits) are paid directly to a person injured in a car collision, regardless of who caused the injuries.
* Through the tort system. If you’re in an accident that was caused by someone else and your medical and other needs are more than what is covered by the Accident Benefits portion of your policy (the amount of coverage differs from province to province), you may be able to sue the at-fault driver for the additional costs. The insurer of the at-fault driver pays for what you receive as a result of your court case.
* Through health care levies. Often, medical costs resulting from car accidents are paid through government health care plans rather than car insurance policies. But car insurers pay governments back for these costs through provincial health care levies. In total, Canadian car insurers paid about $200 million in health care levies last year.

MYTH: If I’m in a car collision (in NB, NS, PEI), for all that I have to go through all I get is $2,500.

FACT: This cap on court awards for pain and suffering continues to cause some confusion. Here are the facts:

* The cap does NOT apply to payments made by your own insurance company (regardless of who caused the accident) for medical treatment of your injuries or for lost income if you miss work.
* The cap does NOT apply to awards for medical and/or other economic losses that you might recover in court if you sue the at-fault driver.
* The cap applies ONLY to awards for pain and suffering, and only if the injury is minor. Pain and suffering awards compensate you for any loss of enjoyment of life you may have suffered because of your injuries. Minor injuries are those that will not have a serious effect on your life, such as neck or back pain that doesn’t linger too long.

So, to sum up, the cap would not necessarily apply if you were in a car accident and it would not limit what you would receive to help you heal from your injuries.

MYTH: No-fault insurance eliminates responsibility and fosters bad driving.

FACT: No-fault insurance is a system in which those injured in a car accident receive compensation and benefits from their own insurance company, regardless of fault. It is designed to reduce the delays of an adversarial legal (or “tort”) system and provide treatment and benefits to injured victims as quickly as possible.
Most provinces in Canada have some form of no-fault accident benefits that are paid to all accident victims. The difference is the degree to which tort (the right to sue) or no-fault (access to accident benefits) is emphasized. For example, Quebec has a pure no-fault system that eliminates the right to sue, but provides substantial accident benefits. Ontario has a “hybrid” system, which blends no-fault and tort.

No-fault insurance does not mean that drivers are never at fault in accidents. There are still fault-based rules of the road, which are enforced by police. If you are at-fault in an accident, your insurance premiums will be affected and, depending on the nature of the accident, you may be charged with an offence. These offences are governed by either provincial motor vehicle legislation, or federal legislation, such as the Criminal Code of Canada.

There is no evidence that no-fault insurance leads to increased numbers of accidents or fatalities/injuries. While some argue that a tort system provides a deterrent against poor driving behaviour, there is no correlation between the type of insurance system and the road safety record of the jurisdiction. Ontario, Quebec, Saskatchewan and Manitoba all have either pure or hybrid no-fault insurance systems. Ontario has one of the best road safety records in North America. British Columbia, Alberta and the Atlantic provinces have tort-based systems. BC has consistently had one of the highest incidences of highway injuries and fatalities of any province in Canada.

MYTH: No-fault insurance treats injured victims unfairly.

FACT: There are trade-offs in any system of auto insurance among rates, claims costs, the right to sue and access to medical treatment. There are also strengths and weaknesses in any auto insurance model. In no-fault insurance systems, the objective is to provide money and treatment to injured victims as quickly as possible. Once an injury is diagnosed, victims receive benefits and treatment paid for by their insurance company.

No-fault insurance usually places restrictions on an individual’s right to sue. In several no-fault provinces, people injured in car collisions by an at-fault party can sue only in specific circumstances, typically those involving serious injury. This restriction is balanced with quick access to medical treatments and benefits.

MYTH: Insurance companies are the only ones who pay for high or excessive legal settlements.

FACT: Insurance companies collect premiums from consumers and use these funds to pay for claims. Money to pay for large legal settlements comes directly from these funds, or in other words, directly from the pockets of each and every policyholder. If claims costs increase, insurers adjust premiums to keep pace.

Until limits were put in place recently, pain and suffering awards for minor injuries, such as sore necks or backs, exceeded $20,000 in many tort-based provinces. This may have benefited a few claimants, but it cost the majority of policyholders in the form of higher premiums.

MYTH: No-fault insurance will increase your premiums.

FACT: There is no evidence that no-fault insurance is more costly to consumers; there is no conclusive proof that insurance rates are less expensive in a tort-based system. Insurance premiums are a reflection of a number of different factors, including driver’s experience, driving record, and geographic location, to name a few. Insurance companies use these factors and deductible levels selection to determine the appropriate premium for the coverage. Comparisons of premiums in tort and no-fault systems across different provinces and cities in Canada are often misleading because they don’t take into account factors such as where a driver lives, levels of coverage, driving experience and driving record.

MYTH: Most provinces that have experimented with no-fault insurance have repealed it and reintroduced tort-based systems.

FACT: In Canada, Quebec, Saskatchewan and Manitoba have the “purest” no-fault auto insurance systems. Quebec’s no-fault system was introduced in 1978, with Manitoba following in 1994 and Saskatchewan in 1995. (In 2003, Saskatchewan introduced an option for persons in the province to recover as though within a tort system. A very small number have requested that option.) In 1990, Ontario introduced a no-fault insurance system that is a “hybrid” system that blends no-fault insurance with the legal right to sue in certain circumstances. All of these provinces have retained strong, no-fault characteristics in their insurance systems.

MYTH: Insurance companies keep changing the rules on what’s covered and what isn’t.

FACT: The business of car insurance is actually highly regulated by provincial governments, who set the minimum coverage levels. Governments also keep tabs on how much insurance companies charge for their products. Insurance companies can change neither the basic coverage nor premiums without government approval.

MYTH: Being caught without a seatbelt doesn’t make me a dangerous driver, so my insurance premiums shouldn’t go up.

FACT: It may be true that you do not pose a danger to other drivers when you don’t wear a seatbelt, but you do pose a serious hazard to yourself. If you are in a collision and you are not wearing a seatbelt, you are much more likely to be injured. For example, think of the difference between the whiplash injuries you may experience if you are wearing a seatbelt during a collision and the more serious injuries you might sustain if you are not wearing a seatbelt and get thrown out of a flipped car or go through the windshield.

When you are injured in a car crash, it is your insurance company that pays your medical expenses. The cost of the rehabilitative care for a whiplash-type injury is lower than the cost of treatment for injuries sustained as a result of getting thrown out of a car during a collision. Therefore, if you do not wear a seatbelt you are a greater risk to your insurance company because you are more likely to submit high-cost claims. This is why insurance premiums may increase when you are convicted of driving without a seatbelt.

As far as your insurer is concerned, driving without a seatbelt does make you a more dangerous driver.

Government-run Auto Insurance

MYTH: Government-run insurance would be “driver-owned.”

FACT: Government-run auto insurance is often referred to as “driver-owned” auto insurance. A truly “driver-owned” auto insurance company would sell shares, have open elections for its board of directors and have annual general meetings. This does not happen with the existing “driver-owned” auto insurance systems in BC, Manitoba and Saskatchewan.

Truly “driver-owned” auto insurance companies already exist within the private sector. Mutual insurance companies are owned by their policyholders. If, at the end of a fiscal year, the mutual insurance company has a profit, the profit is shared among the policyholders. Conversely, if a mutual insurance company suffers a loss, there are provisions for all policyholders to be assessed a levy to make up for this shortfall.

MYTH: Government-run auto insurance systems provide the lowest rates for drivers.

FACT: Insurers provide car insurance within a strict framework of provincial laws and, because of that, insurance systems cost what they cost whether they are owned by government or the private sector.

Premiums in provinces where insurance is delivered by private companies are competitive with premiums in those provinces that have government-run auto insurance systems. However, when it comes to what consumers get for those premiums, the people in the privately run insurance systems are better protected with richer benefits and higher claims payouts.

Government insurers also change rating territories as a way of increasing rates for consumers without applying for a rate increase. Rating territories have been changed in BC frequently in recent years. In November 2002, ICBC made a number of dramatic changes to its rating territories and moved thousands of motorists into higher-priced territories. This resulted in these motorists’ rates increasing dramatically, some by as much as 30%. These are the kind of backdoor rate increases given to the public by government-run auto insurers who have had their “front-door” rate increases capped or limited by regulations or the politics of an election campaign.

MYTH: Government-run auto insurance systems provide the most generous benefits for consumers.

FACT: In all cases, benefits paid by private insurers are richer than those offered by government-run insurers. For example, in the no-fault system in Manitoba, an accident victim who is catastrophically injured has no right to sue for economic loss that exceeds the maximum pre-set payments. The average claim paid in Ontario is nearly $9,000 but in BC the average is only about $2,400. That’s a huge disparity that shows that in Ontario, you get a lot more for your insurance dollar.

MYTH: Government insurers operate more efficiently. They have lower operational expenses.

FACT: The fact is that there are no economies of scale in government-run auto insurance systems. The 2003 administrative expense ratios for Saskatchewan Government Insurance (SGI), Manitoba Public Insurance (MPI) and the Insurance Corporation of British Columbia (ICBC) versus the national private industry (5.7%, 7.3%, 3.3% and 15.4% respectively) are significantly misrepresented.

For example, in ICBC’s 2003 annual report, its operating expense ratio is reported as 18.1%; the private industry’s operating expense ratio for the same period is reported as 28.1%. ICBC’s 18.1% operating expense ratio includes commissions and taxes, but excludes general expenses related to claims. In contrast, when the private auto insurance industry quotes operating expenses, it includes all expenses.

When these differences are accounted for, the operating expense ratios become 18.1% for ICBC and 21.2% for private insurers in BC.

Therefore, the private industry’s expense numbers compare very favourably to ICBC’s and, where they are higher, this can almost wholly be attributed to:

* ICBC’s tax status as a Crown corporation;
* accounting changes at ICBC that have moved items out of expenses and into claims; and
* lower commission rates that ICBC can afford to pay brokers as a result of holding a monopoly on mandatory auto insurance coverage.

MYTH: Government-run auto insurance systems can better control claims costs.

FACT: Actually, no. Historically, not one of the government-run insurers has been able to contain claims costs. In fact, these insurers have resorted to increasing premiums and deductibles, changing rating territories and introducing significant product change, such as no-fault insurance, with greater frequency than private insurers.

The relatively small growth of claims reported by ICBC (3.2%) was accomplished by increasing deductibles and thereby eliminating an estimated 60,000 claims from the system. This move effectively transferred $160 million in the cost of repairs from the government-run insurer to policyholders. This was on top of a rate increase.

Further, according to ICBC’s 2005 year-end results posted on their website, their claims costs in the first nine months were up 11.5% from the same period last year. As a result, ICBC has filed for a 6.5% rate increase in 2006 to “manage” the rising trend in claims it is experiencing. Compare this to private insurers who saw claims rise only 0.2% between 2004 and 2005 according to Office of the Superintendent of Financial Institutions (the federal regulator of insurance companies) site. In light of this, how can it be said that government run auto can better control costs?

MYTH: A government-run insurance company can be started for $2 million. There will be no cost to the taxpayers. The system will be funded by drivers.

FACT: The 2004 report of the New Brunswick Select Committee on Public Automobile Insurance recommended that the province adopt a Manitoba-based model of government-run auto insurance. KPMG, the independent actuaries hired to review the findings of the committee, determined that the cost of establishing a public insurance system would outweigh the claimed benefits.

At a very minimum, the cost of a government-run auto insurance system to taxpayers would equal the cost of operating expenses (such as occupancy, advertising, furniture and equipment, and head office overhead), acquiring office space, and foregone insurance taxes and health care levies, which a government would have to recoup elsewhere. In NB, these costs and lost taxes and health levies would have amounted to at least $140 million in 2004, potentially having an adverse effect on the funding of other public services.

In addition, despite paying back start-up loans, every government-run insurer in Canada has required a taxpayer bailout, whether through direct cash injections or through dedicated tax revenues. In early 1976, less than two years after its inception, ICBC required a 25% rate increase and a bailout of $181 million ($627 million in today’s dollars). None of that money was ever paid back.

MYTH: Government-run auto insurers pay dividends to policyholders.

FACT: The fact is that MPI in 2001, and ICBC in 2000, did pay dividends to policyholders. However, advocates of government-run auto insurance have failed to mention that MPI had a deficit of $97 million following that surplus distribution and had to transfer $93 million from its capital surplus reserves to pay for it. This reserve declined steadily from $143 million in 2001 to $42 million at the end of 2003. Increasing claims pressure (claims costs in 2001 were $30 million more than expected) and a severe weather event would drain this reserve very quickly. MPI estimates that a severe hailstorm could increase claims by as much as $50 million (2001 annual report).

In ICBC’s case, the corporation lost $250 million in the year following the dividend. It couldn’t afford the dividend but paid it out prior to an election. In exchange for the $100 each received, drivers had their deductibles doubled and premiums raised and many were transferred into more expensive rating territories. ICBC paid for this giveaway through a reduction in reserves, which are now at dangerously low levels. This dangerous, politically motivated “dividend” is a perfect example of what is wrong about government-run insurance, not what is right about it. This is not how to run a business.

Insurance Industry

MYTH: Insurance companies are making a fortune on premiums.

FACT: Of every dollar insurance companies collect in premiums, 60 cents goes back to policyholders to pay claims, 18 cents goes to pay operating expenses and 16 cents goes back into communities in the form of taxes. Insurers keep 6 cents as profit.

From 2000 to 2004, the insurance industry’s earnings were substantially lower than the earnings of the rest of the financial sector. In 2002, the industry’s earnings were at an all-time low. That year, investors got an average return of 1.7% on their money, which is unacceptably low for any business. Imagine if you bought shares in a company, a risky proposition at the best of times, and you got a smaller return on your investment than you could have gotten from a bank savings account.

In 2004 and 2005, financial results were generally much better, and car insurers reduced premiums in every jurisdiction where there was a privately run, competitive insurance system.

MYTH: Rates started rising because of the insurance costs of the events of September 11, 2001.

FACT: The terrorist attacks of September 11, 2001 are often cited as “The Cause” of the last round of rate increases, but in fact, the insurance industry has survived similar losses before. Although this event - at the time the world’s largest insurance loss ever - did not help the insurance picture, those within the insurance industry understand that the market had already become more difficult and strained prior to the attacks. The 1998 ice storm is the largest and most expensive natural disaster in Canadian history and, although it was bigger as a share of the Canadian market than September 11 was relative to the size of the US insurance market, it had very little impact on the price consumers paid for insurance afterwards.

What the events of September 11 did do is change how the insurance industry looks at risk and the cost of risk.

MYTH: Insurers don’t pay for damages caused by “Acts of God.”

FACT: The words “Act of God” do not appear in any home, car or business insurance policies in Canada. In fact, insurers frequently pay for claims stemming from events that some might call “acts of God,” such as hurricanes, wildfires, high winds and hailstorms.

It’s true that some natural events are excluded from insurance policies, but there are sound reasons for this. One example of a natural event that is excluded from insurance policies is overland flooding. This type of flooding is not insurable because it only happens in very specific areas - that is, flood plains - where it is almost inevitable. Because people tend to avoid living in areas prone to this type of flooding, very few people have a need for overland flood insurance. If it were offered to those few people seeking it out, overland flood coverage would be very expensive for insurers to provide (due to the almost inevitability of costly claims), so premiums would be unaffordable for most policyholders.

Insurance is about spreading risk among many people. It only works for perils that are unexpected and that could happen to anyone. Naturally occurring events such as overland flooding do not meet these criteria.

What the events of September 11 did do is change how the insurance industry looks at risk and the cost of risk.

MYTH: Natural disasters like Hurricane Katrina cause insurance premiums to go up everywhere.

FACT: Major catastrophes have a direct impact only in the areas where they occur. Elsewhere, they may have an indirect effect. Here’s how it works:

* Insurers also buy insurance. Just like you, your insurance provider buys insurance to help cover unusually big losses that it couldn’t handle on its own. The insurance that insurers buy is called “reinsurance.”
* Reinsurance companies operate all over the world and pay when there is a major disaster, such as Hurricane Katrina. If, based on experience, reinsurers predict a year with exceptionally high losses, they may raise their rates.
* When reinsurers raise rates, insurance companies here in Canada may have to pay more for their reinsurance and that, in turn, could affect the premiums that you pay.

The most important factors affecting your home insurance rates are local risk factors such as where your home is located, how much it would cost to rebuild it, how it’s heated, etc. Your claims history is also important.

For more information on what providers of homeowner’s insurance look for, click here

Claims and Premiums

MYTH: It’s difficult to get paid for a claim.

FACT: Home, auto and business insurers wrote cheques for more than $20 billion in 2005 to help Canadians get the care they needed, to replace lost income, and to repair cars and other property.

MYTH: You’ll always get less than you ask for, so inflate your claim.