A new report from MNP, commissioned by the Insurance Bureau of Canada (IBC), has raised alarm bells over Alberta's auto insurance rate cap. It suggests that the cap may be exacerbating rather than alleviating drivers' financial burdens.
The findings indicate that without immediate reforms, insurance premiums in Alberta could skyrocket by nearly 88 per cent over the next decade.
Aaron Sutherland, Vice-President of IBC's Pacific and Western division, criticized the government’s approach, stating, "The report is clear that despite the government's intention, the rate cap has made auto insurance affordability worse, not better, for Alberta drivers. It must be removed immediately before it causes any further damage." He emphasized the need for meaningful action to address the underlying cost pressures driving insurance prices up.
The MNP report reveals that "good drivers," defined as those with no at-fault accidents in six years and no major tickets in three years, could see their premiums rise by an average of 43.8 per cent by 2033. In stark contrast, drivers who do not qualify as "good drivers" could face increases averaging 148.2 per cent.
Over the past 18 months, Alberta drivers have experienced a 12 per cent rise in premiums despite the government implementing a rate freeze. Those outside the cap's definition have seen annual increases of about 15 per cent, with young and new drivers mainly affected.
One significant concern is that the rate cap has limited market competition. Drivers who switch insurers risk losing their "good driver" status, resulting in higher costs. Life changes such as moving, adding a family member to a policy, or purchasing a new vehicle can push drivers outside the rate cap, exposing them to steep premium hikes.
Sutherland reiterated the need for policy change: "We’ve seen this repeatedly: rate caps simply don’t work and ultimately hurt drivers. Premiums have continued to climb, and coverage availability has diminished. No business can operate when the product it sells costs more than the price it is allowed to charge for it."
The report highlights several cost pressures impacting Alberta’s auto insurance system, including a 19 per cent rise in legal costs, a 27 per cent increase in medical and rehabilitation benefits, and a staggering 55 per cent increase in auto theft. Additionally, the costs of new and used vehicles have risen by 27 per cent and 9 per cent, respectively, and the provincial health levy on auto insurers has surged by 60 per cent.
Sutherland pointed out that these rising costs make it increasingly unfeasible for insurers to operate within the rate cap's constraints, leading to higher premiums and reduced coverage availability for drivers.
"Anytime you're going to cap the price of a product below the cost of delivering it, you're going to run into problems," he noted, drawing parallels to challenges faced in other jurisdictions like California, where similar measures led to insurers exiting the market.
Alberta has not been spared from the impact of natural disasters, further complicating the insurance landscape.
"We are punching well above our weight class in a category we don’t want to be in," Sutherland said, referencing the five costliest natural disasters in Canada’s history occurring in the province. A recent hailstorm in northern Calgary and Airdrie resulted in $2.8 billion in claims, adding additional strain to the auto insurance system.
As Alberta grapples with these challenges, the insurance industry calls for reforms targeting the root causes of rising costs, particularly legal fees. Sutherland stressed the need for Alberta to learn from the approaches taken by other provinces, such as British Columbia and Saskatchewan, where changes have successfully reduced litigation trends and improved affordability.
"If Alberta wants to improve affordability, it must address the cost pressures impacting coverage," Sutherland concluded.
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