Car Insurance in Canada

Posted: December 22nd, 2022

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Car Insurance in Canada

All drivers across Canada should have auto insurance, and the sector is closely monitored by the provincial administration. The provincial leaders oversee how insurance providers assess risks, deal with claims, and establish prices. The leaders in each province, however, only follow terms and conditions within their jurisdictions, and the policies may differ from one region to the other. The provincial government administrators develop the terms and conditions for insurers when determining insurance prices (MNP 3). Besides, insurers can develop rating guidelines and systems for classifying risks validated by officials, and in the majority of provinces, the state must consent any time they require to change the rates (MNP 3). Additionally, the provincial government performs prime functions in ascertaining the number of benefits affected individuals (motorists) can receive through insurance claims. The provincial government also determines what covers can be bought outside the contract with the initial service provider. The administrators in certain provinces allow individuals to sue for agony, pain, and economic deprivation beyond their insurance cover, but offer the merits for obtaining these benefits (MNP 3). The provincial administrators also ensure the terminology used concur with others to achieve uniformity and standardization throughout the sector. The Canadian auto insurance sector is likely to witness growth and satisfaction among buyers when different sellers reach out to customers without much constraint.

How Car Insurance Systems and Companies Work in Different Provinces

The Insurance Corporation of British Columbia (ICBC) regulates all motor vehicle activities in British Columbia (BC). The British Columbia Utilities Commission (BCUC) controls the rates for Basic Autoplan, and while the rates for private or personal insurance are not restricted, insurance givers are liable to regulatory supervision through the BC Financial Institutions Commission (FICOM) (MNP 11). The BCUC serves as an independent agency regulating the province’s energy resources and acts as ICBC’s provider of basic insurance rates. BCUC’s operations fall within the guidelines of the Utilities Commission Act, and besides consenting to the rate applications, the agency’s mandate regarding ICBC is to ensure that services to Basic Autoplan stakeholders are fair, sufficient, and efficient (MNP 11). FICOM on its part governs private insurance institutions, mortgage firms, and unions offering credits (MNP 11). It is an independent agency similar to ICBC, and plays vital roles together with the leading car insurance institution in BC. FICOM regulates private firms offering optional auto insurance as prescribed in the Insurance Act and the Financial Institutions Act.

Roughly, 900 brokers are spread across BC to sell the Basic Autoplan and other optional insurance products from the ICBC. The market is highly restricted, thus requiring brokers to get permission from the agency to sell the plan on behalf of ICBC. The brokers receive compensation based on a combination of commissions and fees, with the Basic Autoplan renewals generating a fee of nearly $14 (MNP 11). BC currently employs a tort-based insurance scheme, whereby drivers engaged in an accident but are not on the wrong have the right for compensation on pain and damages. Unfortunately, the sector for optional insurance is marked by strict barriers to entry, which deter many operators from entering the market.

Other than BC where ICBC dominates the auto insurance market, such operations are quite competitive in Alberta where the market is competitive, which allows different sellers to reach out to consumers. All vehicles in the province are required to acquire a basic auto insurance plan whereby the package includes accident benefits cover and the least amount of $200,000 third-party liability. Buyers in Alberta have the freedom to buy optional coverage, which includes extended, comprehensive, and collision liability (MNP 15). The AIRB mainly controls auto insurance in Alberta, and its main role is to govern auto insurance rating measures for cars for both optional and basic coverage. The OSI, on the other hand, forms and regulates policies for the insurance market and monitors the effectiveness of the companies offering auto insurance in the province. Nearly 43 insurance firms sell both essential and optional auto cover to buyers, and consumers have four dissimilar options through which to buy the cover (MNP 15). One can purchase from an agent selling products provided by a single company or from a direct writer firm that has its sales workers to sell the products through a call center or office, or from a broker who is contracted to sell an auto cover for more than a single insurance firm. Alternatively, drivers in Alberta can purchase directly from the company online. Alberta is similar to BC in the way it employs the tort-based insurance structure whereby faultless drivers in an accident have the right to sue for suffering and pain, as well as economic damages (MNP 15). Drivers lacking the capacity to purchase insurance via voluntary insurance providers have the option of insuring through the residual market structure controlled by the Facility Association. The main difference between the auto cover in BC and Alberta, however, is the level of competition in the auto cover market whereby the latter experiences more competitiveness.

How Companies Compete with Each Other

The auto insurance sector in Canada might be described as a competitive market where many operators compete to give buyers the goods and services they require. According to Thampapillai, no single producer or consumer can dictate the market’s conditions and requirements (4). The author further writes that in a perfectly competitive market, each company assumes that the market price depends on its output; thus, each firm only has to worry about the amount of the production it should give. Whatever the organization ends up producing can be sold to consumers at the prevailing market price with buyers having the choice to select plans that suit them.

BCAA in Burnaby, BC, is an example of a company that offers drivers the chance to acquire optional car insurance coverage, which makes the sector in BC quite competitive. BCAA, being a private operator, understands that some people may choose to get additional cover to achieve peace of mind and complete protection (BCAA). The company hires experts who take time to know their customers’ requirements before giving a suitable option for customized coverage to provide appealing services and remain competitive (BCAA). BCAA seems to be conversant with the need to utilize the concept of competitive dynamics, which could help a firm increase its capacity to compete. Following the guidance of competitive dynamics, BCAA strives to develop features that would increase its competitive advantage as compared to other operators in the sector. The corporation tries to take actions that would evoke reactions from competitors to show its strength and capacity to serve customers. The leaders at BCAA employ the AMC (awareness, motivation, and capability) model where awareness suggests the leaders’ knowledge of competition followed by the motivation to face the rivalry and whether the capability to apply counter-strategies exist (BCAA). These reasons drive BCAA to provide the mandatory ICBC cover and optional car insurance offers that are accessible at affordable prices. The members receive discounts when they purchase both car and home insurance and save up to 10% (BCAA). BCAA tries to gain competitive advantage by allowing members to save 10% of each car when they insure multiple cars and provides discounts on anti-theft devices, fuel-efficient cars, and preferred drivers. More essentially, BCAA strives to attract more buyers by giving other unique coverage benefits such as allowing for one fatality forgiveness, free repairs on windshield chips, protection to the family’s pet, and smash and grab cover (BCAA). Such enticing offers threaten ICBC and make the market more competitive.

Price discrimination, according to the description by Norman et al., refers to a scenario where the seller sales the same service or product to different consumers at different prices (84). Operators in various sectors employ the approach, and the authors give the example of drug manufacturers, hotel chains, and passenger airline companies that are masters in this form of selling. The concept of price discrimination is at play in the car insurance sector where different firms provide almost similar services but charge dissimilar prices. The study shows how drivers in BC pay relatively higher for auto cover than their counterparts in provinces such as Alberta. Apart from the difference in price provincially, organizations in each region set prices that suit their operations and target consumers.

Besides employing the concept of price discrimination to gain much power to compete, the operators in the Canadian auto insurance market consider the formation of mergers and acquisitions to be a suitable approach to becoming more influential. Several auto insurance firms have already formed mergers and acquisitions, while others are contemplating to take over the activities of other companies with the motive of easing operations and gaining wider market share. Westland Insurance Group, which has more than 80 locations in Alberta and BC, is in the final process of acquiringFirst West Insurance Services, which is part of First West Credit Union (Contant). The plan that is set to be finalized by the end of October 2019 is expected to make Westland more influential in the markets where it operates (Contant). Intact Financial Corporation is also planning to merge with On Side Restoration, a plan that is anticipated to improve the output of both companies (Malik). The partnership between Intact Financial Corporation and On Side Restoration is an example of a vertical merger whereby both firms are involved at different levels of the supply chain for the partnership’s common good (Norman et al. 340). This form of association differs from a horizontal partnership where both companies involved in activities together at all levels.

However, whereas some of these partnerships record good results, that is not the case in all situations as several companies tend to witness more constraints. Partners with more different work structures and culture encounter more problems running the business, and the same happens to firms that fail to develop common goals and objectives (Morris). Most of the organizations forming mergers but lack adequate measures to foster operations usually cease to function after a while, which shows the need to develop structures that would guide activities (Morris). Such corporations enter into mergers and acquisitions with the hope of benefiting from the gains that come with the strategic partnerships. Merging makes it possible to increase the market share as the buyers of the partnering groups should acquire cover from a single entity.

Dominance by ICBC

Even as various companies try to compete with each other, it is apparent the ICBC dominates the market in British Columbia. The report by MNP informs how the provincial Crown Corporation is in charge of offering compulsory auto cover, although people have the choice of purchasing optional insurance coverage from private insurance firms or ICBC (8). The firm continues to provide universal auto insurance to drivers in BC since its formation in 1973, and the primary Autoplan services include protecting under-insured motorists, third-party legal liability, inverse coverage, hit-and-run covers, and accident benefits (MNP 10). The company offers several other services such as car registration and licensing, driver testing, training and licensing, maintenance of driving records, collecting fees for driving offenses, and enforcing road safety in collaboration with the Solicitor General and the Ministry of Public Safety (MNP 10).

Various groups feel the monopoly by ICBC is inappropriate and are calling for an end of such dominance. Already, the BC Chamber of Commerce is creating opposition against ICBC’s monopoly over BC’s auto insurance system. The Insurance Bureau of Canada (IBC) supports the call to end ICBC’s monopoly, which makes the call more serious and impactful (Norman et al. 10). The BC Chamber of Commerce supports competition in the auto insurance industry, and the view receives the backing of various provinces. Aaron Sutherland who serves as the Vice President of IBC said in a statement that most residents of British Columbia desire a wide choice in auto insurance, and extending the BC auto market could save drivers up to $320 every year (Norman et al.10). Sutherland further stated that competition offers a powerful incentive for any firm to give the best products at suitable prices and auto insurance is not excluded from the regulation. IBC referred to data from the General Insurance Statistical Agency and ICBC showing how drivers in British Columbia pay the highest rates in auto insurance in the country, with drivers having yearly premiums ranging $1,679 in 2017 (Norman et al. 10).

Other groups take approaches they believe will help to end ICBC’s monopoly in BC. Kris Sims heads the Taxpayer Federation in BC and appears to be taking a new approach to address the monopoly ICBC enjoys on car insurance. Sims, together with his group, proposed the development of a cartoon-man towering 30-foot high holding some money in one hand (Yuzda). Sims, while presiding over the erection of the balloon outside the B.C. legislature, said the creation holding cash in its hands with empty pockets is set to sensitize drivers on the lack of proper competition and adequate coverage. Sims, while addressing the congregation, declared that it is unfair that the residents of BC pay the highest rates to insure their vehicles not only in Canada but also in the whole of America (Yuzda). Sims added that the creation of the cartoon will highlight the need to transform the BC auto insurance sector and allow for appropriate competition (Yuzda). Sims feels that denying the residents of BC the chance to choose the auto insurance plan of their choice could largely determine the outcome of next elections where more people are likely to vote in a person who shall transform the sector.

How Consumers Benefit

Evaluating different market structures such as monopoly and oligopoly may help to understand whether consumers benefit from the way car insurance companies conduct their operations in various Canadian provinces. It is highly likely the residents of BC do not enjoy many insurance benefits with ICBC monopolizing the market. Norman et al. describe a monopoly as a market structure where a single entity produces, markets, and sells a particular product or service. The market would be termed a pure monopoly if only a single seller existed, with no threatening substitutes for the goods or services being offered. Sometimes, there are many other operators in the sector and substitutes for the goods or services, but the monopolizing firm retains huge market share and power. Operators in a monopolistic market usually seek to maximize their profits and would do anything to achieve the returns they highly anticipate (Norman et al. 97). Most operators in a monopolistic market determine the prices of goods and services, and other operators have no option but to comply with the set rates. Another common feature of monopoly is high barriers such that other operators find it difficult to enter the markets. The other characteristic of a monopoly system is the existence of a single seller who gives all the output; therefore, the entire market depends on the services of one company, and for practical reasons, the firm is similar to the industry (Norman et al. 97). Another quality of a monopoly that is likely to affect buyers is the issue of price discrimination whereby the operator may choose to sell similar products or services at higher prices or even lower rates to attract more customers or generate high profits.

Based on the attributes of a monopoly market structure, it is evident buyers in BC are not likely to benefit as it would happen with consumers in areas with no dominance by a single operator. Unfortunately, the purchasers in a monopolistic market may have to cope with the high prices set by the leading organization and may lack the option of choosing from a wide range of service providers. The buyers only have to bear with the single seller who offers products and services as they desire even if it means setting high prices. Consumers are also likely to pay higher prices in markets with monopolistic structures as one of the main motivators for the service provider is to generate more profits. Monopolies usually derive their power from various sources, which may compel consumers to only consider acquiring goods and services from the firm (Norman et al. 98). The technological dominance by some monopolies put them in a better position to purchase, assimilate, and employ the finest machinery in manufacturing goods and offering services, while ne operators either do not meet the high fixed costs needed for the appropriate technology or do not have the needed expertise (Norman et al. 98). Such monopolistic operators would also derive their power from the economic barriers that may derail other operators’ attempts to enter the market. The failure by other companies to enter the market because of impediments such as high capital requirements and high cost of labor and technology may prevent buyers from enjoying the services of various operators, which leads to a monopolized market.

Indeed, buyers are more likely to benefit in provinces that adopt an oligopoly market structure than they would do in monopolies. An oligopoly refers to a structure where the industry or market is dominated by a small group of large operators, usually called oligopolists (Norman et al. 112). The operators in an oligopoly market are likely to know the activities of others, and as it happens, the decision a particular firm takes is largely influenced by those of others, and the strategic measures a company takes are likely to elicit some responses from other operators (Norman et al. 112). Buyers usually have strong brand loyalty in oligopoly settings, and because of high investment needs, only viable operators are likely to enter the sector. Oligopolies exist in developed economies as perfect competitive entities that give buyers a wide range of options to choose from.

Policy Changes in BC and Possible Effects

The BC administration and ICBC have released a report detailing a multi-faceted approach for lowering escalations in fundamental insurance rates and altering the auto insurance framework for drivers in the westernmost province. The announced changes include developing a definition of what constitutes minor injuries and forming a $5,500 limit on payouts for suffering or pain occurring from minor injuries (MNP 12). The change further increases accident benefits to include an expansion to the limit for physiotherapy and medical costs for treatment, a boost to wage loss payment, a growth in payouts to funeral costs, and a cover to additional forms of treatments (MNP 12). The announced policy modifications to auto coverage in BC further amend the rating structure utilized to set premiums and institutes one-accident forgiveness where experienced drivers with at least 20 years experience are eligible for forgiveness if they have not engaged in any accident for the past 10 years. The change expands British Columbia’s Civil Resolution Tribunal mandate to include conflicts involving small injury reports or claims below a limit, which will not pass $50,000 (MNP 12). Furthermore, the policy change affects the BC Supreme Court Civil Rules Regulation, which shall regulate the number of experts and the reports that may be presented to address the issue of damages such as future care and future wage loss. The policy requires only a single expert and their report for claims not surpassing $100,000, while the number of experts and their reports may not pass three in other cases (MNP 12). The teams in charge of auto insurance in BC believe the changes will improve the nature of auto insurance in the province.

Based on the evaluation of the announced transformations, the alterations will change how to calculate insurance premiums, and drivers are more likely to benefit. The modification can promote payouts to drivers even in case of minor injury claims. The definition for minor injury as part of the announced transformations is a mental or physical injury, whether chronic or not, that does not result in a severe impairment or a permanent severe disfigurement of the complainant (MNP 14). A minor injury could be perceived as a psychiatric or psychological condition, an injury in a prescribed class, a pain syndrome, and a strain or an abrasion (MNP 14). Furthermore, the claimant shall have the right to choose a medical professional who shall determine the nature of the injury. Most importantly, the proposed transformations increase the accident benefits, which raise the gains drivers may get from the policy. The limits on payouts for suffering and pain will be escorted with an increase in the accident benefits available to buyers. The change increases the loss coverage to $440 every week, payments for a funeral will escalate by $5000, and the limits on death benefits shall rise by nearly $10,000 (MNP 14). The benefits drivers are expected to get in BC encourages many purchasers to welcome the transformations, but still many pray the market becomes competitive.

Recommendations

The team in charge of auto insurance in BC should adopt certain mechanisms to ensure buyers get the services at relatively affordable rates. The operators in the region need to consider the possible negative effects of putting the rates so high such that some drivers find it straining to secure the ICBC’s cover. The administrators should also spend some time reviewing the policy even further to ensure buyers pay reasonable prices for the cover. More importantly, the federal government should intervene in the issue of auto cover by developing legislations that would impact on both sellers and buyers.

Conclusion

The study explores the nature of the auto insurance market in Canada and elaborates how different groups strive to increase their market cover. Drivers in BC pay much for auto insurance compared with their fellows in Alberta despite having the same model. Different groups are already opposing the ICBC’s dominance in BC and are advocating for competition in the sector. The situation is different in Alberta where a competitive market permits various service providers to attend to buyers. The companies in the sector try to embrace approaches that will improve operations, with some forming mergers and acquisitions. The administrators in BC have introduced a set of new directives with the hope that the transformations will benefit drivers. Drivers will now be able to get compensation for damages when they are not on the wrong, and the total weekly loss coverage shall increase.

Works Cited

BCAA. “BCAA.” BCAA, 2018,

.www.bcaa.com/insurance. Accessed 2 October 2019

Contant, Jason. “Brokerage Acquires Credit Union’s Insurance Subsidiary.” Canadian Underwriter, 26 August 2019,

www.canadianunderwriter.ca/mergers-and-aqcuisitions/brokerage-acquires-credit-unions-insurance-subsidiary-1004167556/. Accessed 2 October 2019

Malik, Adam. “Intact’s other Deal: ‘You can bet that other Insurers are Paying Close Attention’.” Canadian Underwriter, 20 August 2019,

www.canadianunderwriter.ca/mergers-and-aqcuisitions/intacts-other-deal-you-can-bet-that-other-insurers-are-paying-close-attention-1004167307/. Accessed 2 October 2019

MNP. Comparison of Auto Insurance in BC and Alberta. MNP, 2019.

Morris, Peter. “Mergers and Acquisitions in the Insurance Industry.” insBlogs, 7 March 2014, www.insblogs.com/markets-coverages/mergers-acquisitions-insurance-industry/362. Accessed 2 October 2019

Norman, George, et al. Industrial Organization: Contemporary Theory and Empirical Applications. John Wiley & Sons, 2014. www.oreilly.com/library/view/industrial-organization-contemporary/9781118250303/. Accessed 2 October 2019

Thampapillai, Dodo. “Perfect Competition and Sustainability: A Brief History.” International Journal of Social Economics, vol. 37, no. 5, 2010, pp. 384-390.

Yuzda, Liza. “Taxpayers Federation Protest Lack of Car Insurance Competition in BC.” CityNews, 8 May 2019,

www.citynews1130.com/2019/05/08/icbc-monopoly-taxpayers-federation/. Accessed 2 October 2019