The Ontario government should not try to set insurance rates

Blog, Regulation, Steve Lafleur

In an attempt to garner NDP support for the provincial budget, the governing Liberals have pledged to reduce auto insurance rates by 15 percent. While this makes for excellent retail politics, it doesn’t make any economic sense.

Insurance rates are determined by many factors, but the fundamental role of insurance rates is two-fold: generating sufficient revenue to compensate accident victims, and reducing the number of collisions that happen to begin with.

It is entirely possible — if not likely — that costs are unnecessarily high due to fraud, or bad regulations. But mandating a specific rate reduction would go some way towards undermining the fundamental goal of auto insurance.

The government should do what it can to create the conditions for market driven insurance rates that internalize the entire cost of collisions and payouts (which would presumably be lower).

There is no good reason to subsidize auto insurance, and there certainly is no reason to undermine the industry. No one likes paying for auto insurance. But Ontarians are all better off having a functional insurance system that adequately accounts for risk and consequences.