Auto Insurance: Comparing Apples and Oranges

Commentary, Crown Corporations, Frontier Centre, Uncategorized

Conventional wisdom holds that people who purchase automobile insurance in provinces with publicly owned monopolies are paying much lower prices. In part, that myth is perpetuated by wildly inaccurate comparisons offered up by the Consumers Association of Canada (CAC).

The CAC has long claimed that private sector insurance is a rotten deal. Its president, Bruce Cran, always offers as proof a striking, side-by-side example: in the Saskatchewan-Alberta border city of Lloydminster, purchasers in Saskatchewan pay much less than those in Alberta. But what Cran doesn’t note is that the average payout for a claim in Saskatchewan is $4,135, compared to $11,895 in Alberta.

Differences in payouts affect premiums. In Manitoba and Saskatchewan, governments have legislated “no fault” policies, which avoid the use of courts to decide payouts. That sharply reduces the amount their respective agencies pay for claims.

This error in calculating comparisons—the classic “apples and oranges” problem—is only one aspect of the CAC’s mistakes. They exaggerate average premiums in provinces with private-sector provision by using different methods than they use when they look at provinces where governments sell most or all of the auto insurance policies.

To demonstrate this error, let’s present a question. If you want to get the actual average price of a “widget” sold on E-bay last year, you should: A. Take the total dollar value of all sales and then divide it by the number of items sold. Or, you should: B. Take opening “for sale” bids from owners, total those up, and then divide by the number of people who offer up their widgets.

If you chose option A, congratulations. That’s the proper way to calculate an average selling price. Ten widgets sold with a total value of $15 means the average price is $1.50. In contrast, if you chose option B, you’ve calculated the average asking price. Suppose 3.9 million widgets are up for sale on E-bay and the total value of what sellers are asking for them is $7.8 million. The average price for a widget then looks like $2, even though they actually sold for $1.50.

If you chose Option B, you also might like to work for the Consumers Association of Canada. The organization’s past studies, including one released late in October, routinely compare apples (bids) and oranges (actual prices). The group then claims that government auto insurance is a swell deal.

In a public letter that defends the use of Internet quotes as reflective of real prices, Cran argues that this methodology has been “fully reviewed by a professor of actuarial science and confirmed as being valid.” Great. But all that means is that the lobby group can add up almost 3.9 million web-based insurance quotes. The resulting averages and comparisons are still a skewed, inaccurate portrayal of insurance rates in private sector provinces. That’s because the CAC’s internet quotes (“apples”) are not actual premiums (”oranges”) paid by real drivers.

To understand why this methodology leads to inaccurate portrayals of insurance costs in provinces with private provides, apply the widget example to insurance. Suppose three drivers paid $1,000, $1,500 and $5,000 respectively. Divide the total ($7,500) by the number of insurance policies (three), and the average premium is $2,500. That’s how the insurance industry arrives at their numbers.

Now use the CAC method of calculating averages. Take quotes from the internet, say five: $1,000, $1,500, $3,000, $4,000 and $5,000. The average price is $2,900. Even if one removes the lowest and highest prices, as the CAC does, the average in this example is $2,833.

Thus, whether one uses high or low numbers, three, five or the CAC’s 3.9 million internet quotes, the averages are unreliable “ghost” comparisons because they’re not based on what drivers pay in the real world. That’s how the CAC can claim an “average” insurance premium is $2,383 in Ontario and $1,714 in Alberta, while industry’s own bullet-proof numbers are significantly lower at $1,279 and $1,127 respectively.

The Consumers’ Association quotes the average Manitoba rate in its studies as $1,109. But how is that average produced? Not by using multiple Internet quotes; private auto insurers don’t exist in Manitoba. Instead, Manitoba Public Insurance gave the CAC 3,000 quotes for various rating profiles.

Unlike private sector provinces, the MPI quotes are also what drivers end up paying, since drivers must buy their policies from that agency. So, oddly, the CAC accepts averages based on actual prices paid in public insurance provinces. But in private sector provinces, it then ignores actual prices paid—what real-world drivers shell out for insurance—in favour of Internet averages.

Ironically, MPI says the actual average payment for insuring a family passenger vehicle in Manitoba is $768, not even the CAC’s over-estimated figure. That doesn’t necessarily mean government insurance is a good deal. Different types of coverage, varying accident rates and vastly different payouts mean that inter-provincial comparisons may still largely be looking at different “fruits.” Toronto is a higher-risk city than Winnipeg, so of course insurance will cost more.

But if the MPI figure is accurate, what is clear is that Consumers Association overestimates the cost of insurance right across the country, just more egregiously so in private sector provinces.

The industry’s interests are obvious but they, unlike the CAC, do provide requested information. The only time the Consumers’ Association provided any comment—but no data—to this writer was two years ago. The results were not flattering for Cran. Theresa Courneyea, who was then CAC’s Ontario director, said Cran’s insurance comparisons “violated arithmetic” and “slanted the picture.” The Ontario branch wrote the Globe and Mail to argue that Ontario’s average premium in 2003 was $1,310, not $2,504, as Cran claimed, a figure that CAC-Ontario labeled “excessive.”

The CAC claims that its insurance studies measure what identical drivers would pay in each of the provinces. Except they don’t. To properly do that, the consumer group would have to use only actual premium prices paid for by policyholders in private-sector provinces. Instead, the CAC takes wildly varying Internet quotes, which are the insurance equivalent of opening bids on E-bay. If you think that reflects the actual average insurance cost in Alberta and Ontario, you’ll also believe that E-bay offers and bids are equivalent to the final price of a widget.

Canadians need accurate numbers to judge whether or not government auto insurance monopolies deliver better rates. The government-funded and union-funded Consumer’s Association should drop its bias and report rates based on actual premiums paid, not abstract averages of bid prices.

Mark Milke (mmilke@telus.net) is a Toronto-based economist and the author of Tax Me I’m Canadian, Your Money and How Politicians Spend It.