The Real Scoop on those ‘Obscene’ Insurance Profits

Commentary, Frontier Centre, Role of Government, Worth A Look

If politicians want consumers to obtain better deals on automotive insurance, they have several options, and none include jumping into bed with critics of competition.

On recent news that insurance companies made a $4.2-billion profit in 2004, Bruce Cran, president of the Consumers Association of Canada, labeled such a return “obscene” and called for rollbacks. The Alberta government then commissioned yet another review of insurance rates.
There is some irony in the Alberta government — with its own projected $4.1-billion surplus this fiscal year — reviewing regulated policy rates because of $4.2-billion insurance company profits. Klein has known about his government’s surplus for some time and it’s not as if he ordered a review of tax rates.

But Alberta’s politicians are not the only people tempted to interfere in contracts between consenting adults. On insurance, some in the media and oft-quoted critics also shrink the boundaries of economic enlightenment instead of expanding them.

Enter CAC’s Cran, who was cited in various reports with his obscene-profits accusation. Problem is, the Consumers Association’s 2003 studies were so flawed that even the then-president of the group’s Ontario wing said she wouldn’t use them.

“We have some concerns about their numbers,” Theresa Cournieyea told me in 2003. She also noted the CAC’s inter-provincial comparisons violated arithmetic and “slant the picture.”
Part of that slant occurred because the CAC chose the median price out of 10 in provinces with private sector insurance. That cherry-picked price was then compared to quotes offered in provinces where the insurer is government-owned, such as British Columbia.

But all else being equal, most consumers don’t choose the fourth or fifth highest price out of 10 quotes. They pick the lowest-priced policy. That would have shown a far different picture of insurance rates.

In a B.C. versus Alberta comparison, I used the CAC’s categories and quotes from Canadian Direct (not just the “median” quote out of 10). It turned out consumers could pay less in 25 of the 34 categories if they were insured by Canadian Direct in Calgary as opposed to ICBC in Vancouver.
The CAC’s studies were statistical junk. Still, they attracted much attention when released in 2003.
The logical (though absurd) end of restricting industry profits in a banner year is that governments presumably should immediately order premiums to be raised when the sector is headed for poor returns or a net loss. It’s just a hunch, but I doubt the critics or the politicians care to be that consistent.

As for the claim of obscenity, that’s a moral label applied to an economic transaction and it’s fascinating to speculate on what is then permissible in the universe of such critics. If a 20 per cent profit on risked capital is obscene, what’s decent in a moral sense — 10 per cent? Or six per cent? Maybe just two per cent?

Rhetoric aside, to get the best deal for consumers, there are several actions governments could take.

First, open up auto insurance to full competition where it doesn’t exist.

Second, politicians should refrain from telling insurers whom to insure and for how much. Right now, in both government-insured B.C. (for basic automotive insurance) and in private-sector Alberta, insurers are forced to ignore actuarial tables and risk categories in favour of politically created ones.

So instead of charging consumers based on risk, such as on age and gender in addition to their driving record, government direction means companies give breaks to statistically dangerous drivers. That’s unwise and forces good drivers and statistically safe drivers to pay more.
Third, the Insurance Bureau of Canada says insurers will cut premiums by $1.4 billion this year because of their profits. Great. Governments so concerned about high insurance rates can at least match that $6 billion in taxes they took in nationwide from the insurance industry and policyholders last year.

Fourth, the federal government should dump its restriction on who can sell insurance and also drop its ban on tied selling. Currently, banks can sell insurance but are not allowed to cut customers a deal on other items at the same time.

That’s unhelpful to consumers who could benefit from such deals and it is also deleterious to competition in general. Full competition on insurance is the best safeguard against gouging.
All of the above would serve the interest of consumers. It would also be superior to yet another round of commissions to examine insurance profits.