RM Issue #030906
Car insurance: a mortality tale
Ontario political parties promise lower costs for drivers, but a recent study shows that government- influenced premiums produce more deaths and injuries, says MARK MULLINS
By MARK MULLINS
Thursday, September 4, 2003 - Page A27
Auto insurance will be a central issue in the Ontario provincial election. Not only are people hopping mad as they face rising premiums, but there is also a neat solution offered by Howard Hampton and the NDP: public insurance.
Driving the Hampton way apparently means lower costs, low and stable premium rates and fairer access to insurance. Or at least that is what the NDP Web site advertises. As the man says so often, the answer is "public power," code for nationalizing private-sector activity.
Can the solution really be so easy? Eliminate the activities of more than 100 Ontario insurers, none of which dominate the market. Replace it all with centralized government bureaucracy, paid for by taxpayers. Have politicians set premiums and civil servants provide customer service. Presto, whammo, the result is supposedly a better auto insurance system for all. You must admit, this policy solution does not automatically conjure up images of either low cost or high-quality service.
Neither do the solutions offered by the other two major political parties. Both the Liberals and the governing Conservatives have auto-insurance policies that essentially promise more government interference in the marketplace.
The Ernie Eves Tories have a plan to limit the right to sue for damages, while at the same time mandating more automatic benefits for victims. If their anticipated cost reductions do not translate into lower premiums, the "government will take action," including "rate caps, rate freezes or rate rollbacks."
By comparison, the Dalton McGuinty Liberals are Tories in a hurry. They commit to freezing premiums immediately, forcing premiums down 10-per-cent within 90 days and setting an auto-insurance watchdog on the industry to further manipulate premiums in the future.
New research from the Fraser Institute should give all of those politicians pause.
The simple truth is that messing around with premiums in a complicated business like insurance can have lethal consequences. In fact, a study out this week estimates that a completely public insurance system, based on something called social-risk pricing, could lead to 50 more deaths a year and 3,900 more injuries for young people in Ontario. The number of collisions could also rise by more than one-fifth.
One starting point to understanding why government intervention is not the better way is to realize that auto insurance does not require the state's rough touch. There is no market failure to address and no overriding public interest that must be defended, aside from fiscal solvency for insurers.
The thin reed supporting government intervention is that auto insurance is mandatory. Then again, eating is mandatory (or least recommended), and it is not therefore required that the government should either produce, distribute or control the prices of food products (though food-standards regulation is quite sensible). If Britain, Germany, and U.S. states can do without state-dominated auto insurance, then so can we.
A second reason to fear the effects of politically motivated (and usually well-intentioned) government measures is more subtle. Here is where social-risk pricing comes in. The insurance business is all about measuring and matching premiums and costs to risk. If young males cause more accidents (and they do, owing to inexperience and behaviour), then that risk should be paid for directly through higher premiums. That is how Ontario's market works now.
Social-risk pricing does away with risk matching. In the name of preventing discrimination, premium rates are set the same for motorists, regardless of age or gender or marital status (or sometimes even location). Everyone essentially pays the same, thus leading safe drivers to subsidize dangerous ones, and leading to an incentive for more of the most dangerous class of drivers (young people, especially males) to hit the road.
The evidence across public insurance and market insurance provinces is compelling. Fatality rates from vehicle collisions in B.C., Saskatchewan and Manitoba (the public insurers) are 18-per-cent higher than in the other provinces. Deaths per kilometre travelled are one-third higher in the three social-risk pricing provinces. Hospital admissions resulting from collisions are almost 1.5 times higher, and admissions for young males are 59-per-cent higher.
A look across all of the possible explanations for these differences -- demographics, urbanization, education, income, weather, traffic conditions, crime, alcoholism and access to medical services -- reveals that social-risk pricing is the likeliest explanation.
Taking the collision gap between the two sets of provinces (represented by Saskatchewan and Manitoba on one side, and Alberta, Ontario and Nova Scotia on the other, since those places provided the most detailed data), one can estimate the impact of moving Ontario to a public-insurance system. Vehicle collisions overall would rise by 17 per cent, property-damage collisions would rise by 21 per cent, and collisions would rise 41 per cent for young people between16 and 24.
In an effort to provide politically pleasing answers, arbitrary government interference with risk pricing ends up producing more deaths, injuries and property damage, especially for young drivers. That is as true for those advocating a full publicly owned insurance system, as for those merely forcing premium rates on insurers. It is too steep a price to pay for equal access to the privilege of driving. Politics does not belong in auto insurance.
Mark Mullins is the director of Ontario policy studies at the Fraser Institute in Toronto.