Junk Statistics Backfire in Fight Over Car Insurance

Commentary, Crown Corporations, Frontier Centre

Never underestimate the ability of misleading statistics to throw politicians into frenzies and create solutions to non-existent problems. The latest example comes from the debate over automobile insurance, sparked by a court ruling which threw out a $4,000 provincially legislated cap on soft-tissue injuries.

The ruling is a side issue in the wider debate over whether Alberta's government should consider so-called "public" insurance such as exists in British Columbia, Saskatchewan and Manitoba. Those models, more properly described as government monopolies on basic mandatory coverage, are too often driven by political and not actuarial calculations. That explains why some politicians like them.

Thus, NDP Leader Brian Mason claims Albertans would pay $400 less on average if they had a government system. Liberal Leader Kevin Taft asserts British Columbians love their government insurer.

Nonsense. I'm from B.C. and have paid insurance in both provinces. I'd pay $425 more this year if I lived in Vancouver and not Calgary. My $958 Canadian Direct insurance policy would be $1,383, 44 per cent higher with B.C.'s government insurer. So every Albertan should be aware that both Mason and his source are publicizing junk statistics.

In 2003 and 2005, Mason's source, the Consumers' Association of Canada (CAC), produced studies on automobile insurance that made front-page news.

The problem was their studies were flawed. They gave estimates of automobile premiums in private sector provinces that didn't reflect what drivers actually paid.

For example, in 2005 the consumer group claimed the average insurance premium in Ontario was $2,383 and $1,714 in Alberta. Horrifying, right? Proof that private-sector competition failed in the two provinces, yes? Hardly. The CAC's "estimates" were wild exaggerations. The actual average premium paid by an Ontario motorist in 2005 was $1,319. The average Alberta premium was $1,022. The Consumers' Association overstated average Ontario premiums by a whopping 81 per cent and Alberta's by a marginally less whopping 68 per cent.

How did the CAC get away with it? The group used Internet quotes for insurance instead of real prices paid to produce their final estimates.

Why does this matter? Because Internet quotes are mere bids for a product. They don't reflect the actual prices paid. To use millions of Internet quotes, exactly what the CAC did in 2005, doesn't produce an accurate, real-world average any more than averaging millions of eBay bids accurately reflects the final price of some product.

For example, suppose an Alberta driver shops around the Internet and finds three quotes at $900, $1,200 and $1,400. According to CAC calculations, the average insurance premium is $1,166.

Except that it's not. The (only) proper way to calculate actual average insurance prices is to take the total value of premiums paid in a year, divide by the actual number of policies written and, voila, produce the average. Anything else is statistical chicanery, at least if it claims to represent real-world averages.

Don't take my word for it. In 2003, I interviewed the then-Ontario director for the Consumers' Association, Theresa Courneyea. Speaking of her organization's B.C. and Ottawa offices, which came up with the junk statistical averages, Courneyea said the CAC's numbers violated arithmetic, "slants the picture," and that she had "some concerns about their numbers."

Calculating averages from real paid policies in 2005 show Ontario was the most expensive, with an average premium of $1,319, followed by B.C. at $1,153. Alberta was third at $1,022. Manitoba and Saskatchewan clocked in at $920 and $738, respectively.

Does this yet prove "public" auto insurance is a good deal, B.C. excepted? No, for several reasons, including that Saskatchewan and Manitoba have smaller populations and are more rural relative to Alberta. Those two factors make accidents less likely as a proportion of licensed drivers.

Also, to figure out whether an insurance premium is a good deal, it's useful to ask what insurers' costs are in the event of an accident.

In 2005, the average claim for mandatory coverage was a whopping $15,959 in Ontario and $9,028 in Alberta. In contrast, the average claim was $6,123 in B.C., $5,453 in Saskatchewan and $2,747 in Manitoba. By that measure, government automobile insurance doesn't stack up so well.

So contrary to political misperceptions, monopolized government automobile insurance is expensive, sometimes in straightforward dollar comparisons (B.C. versus Alberta) and always when one drills down into the actual product.

Government automobile insurance is anything but a bargain. It's not something any politician who fancies himself adept at basic statistics should ever consider.