Deregulate the car insurance industry



Ontario NDP Leader Andrea Horwath is demanding lower auto insurance rates, an issue she’s prepared to take to the polls.

Horwath wants a 15% cut in Ontario car insurance rates as part of Finance Minister Charles Sousa’s first budget.

If not, she says, Premier Kathleen Wynne’s Liberal minority government will fall.

At first glance, this one seems easy for the Liberals.

Politically, lower insurance rates are popular with the public and it won’t cost the government a nickel in revenue since car insurance isn’t subject to HST.

The only “victims” in cutting rates would be monolithic insurance companies, and let’s be honest, who really cares about their bottom line?

But decisions that seem easy are usually best avoided, especially this one which would treat the symptom — high insurance premiums — but not the disease, which is the systemic flaws in auto insurance regulations.

Rather than Horwath’s simplistic fix, why not give the free market a chance?

Even the insurance companies admit there are problems with insurance rates.

The Insurance Bureau of Canada points to fraudulent claims causing higher rates, but that’s a red herring.

Fraud is nothing new for car insurance companies, it’s been embedded in our compulsory automobile insurance system since the beginning.

Are fraudsters suddenly more effective at milking the system than they were five years, 10 years or a generation ago?

Of course not. The ambulance-chasing lawyer and the neck-brace wearing faker have long been part of the insurance game.

What’s really happening here is that we are experiencing a prolonged period of low interest rates, which affects insurers who traditionally make their profits from investments, while attempting to break even on underwriting activities.

The government makes it mandatory for insurance companies to include a certain allowance for profit in the rates they charge Ontario drivers.

When investments don’t produce enough profits, the government’s own rules require insurers to target certain profits that force the insurers to raise rates.

The fact the government actually mandates profits in car insurance premiums is troublesome to Ontario consumers.

The way financial markets are supposed to work is that investors and entrepreneurs try to maximize their profits, while accepting the risk they may lose money.

Capitalism only works when businesses face the risk of failure, thus encouraging efficiencies, innovations and ultimately, profits.

But in the world of car insurers, there is barely any risk of failure, so there is no need for the car insurance companies to get any better.

To borrow a phrase from Fox News host John Stossel, “That’s not capitalism. That’s craptitalism”.

To improve our system, we need to allow car insurance companies to take risks, even if it means insurers could potentially fail.

Due to the amount of regulatory red tape, the current market favours only the largest insurance companies.

Even companies generating hundreds of millions of dollars in premiums are often considered too small to compete. That’s why the auto insurance industry has experienced rapid consolidation, leading to fewer competitors.

Large insurance companies are gobbling up smaller ones.

The real solution lies in removing a lot of the regulatory red tape for smaller companies, to encourage new entrants into the market.

Allow insurers the freedom to set rates, without having to justify to the government whether they will prove profitable.

The provincial government can certainly put in place rules regarding capital requirements and solvency tests, but it’s no business of the government whether a company actually makes money.

By introducing smaller insurance companies that are focused on winning new customers to the market, the largest companies will be forced to compete for customers once again.

It’s through competition, not legislation, that we can make long-term sustainable changes to Ontario car insurance.

If Sousa wants to give Ontarians better car insurance rates, he should deregulate the industry. 

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