A C.D. Howe Institute study confirms that Canadians pay higher premiums for property and casualty (P&C) insurance than citizens in many other developed nations. The study then explains why — and suggests steps that governments can take to mitigate the problem. In "The High Price of Prudence – Benchmarking Canada’s Property and Casualty Industry (Second Edition)," Institute Senior Fellow Alister Campbell uses Organisation for Economic Co-operation and Development (OECD) data and private industry data to compare the national P&C insurance sector’s premiums as a percentage of Gross Domestic Product with its international peers and provides comparisons with the results of his initial study. He then takes a deeper dive into province-by-province results in search of explanations for the high overall averages.Why do Canadians pay more than $80 billion a year in P&C premiums — more than 3% of GDP? Campbell finds that it isn’t a result of unreasonable insurance company pricing. In fact, the Canadian insurance industry’s underwriting performance is totally average and returns on equity lag international peers. "We’re paying higher premiums, but the industry isn’t simply pocketing the proceeds. What’s going on?" he asks. The answer, he finds, is mostly government policy. "In the case of auto insurance, it’s a case of government doing too much, and in the case of property insurance, it’s a case of government not doing enough," he says. .In terms of auto insurance, Canada’s high overall average is skewed by elevated premiums in four provinces: Ontario, Manitoba, Saskatchewan and Alberta. In the case of Manitoba and Saskatchewan, auto insurance is run by a government monopoly — with higher premiums as a percentage of GDP the outcome.Alberta and Ontario have competitive, private insurance markets, but Alberta has — until recently — insisted on maintaining a costly tort system that sees high percentages of total premiums pocketed by lawyers. Meanwhile, in Ontario, particularly generous accident benefits and a failure to crack down adequately on auto theft and insurance fraud have contributed to the much higher average premiums. Unlike auto insurance, personal property insurance premiums are more consistent province-by-province — meaning the premiums all Canadians pay are abnormally high: 1.23% of GDP, almost double the 0.66% average of other G7 peers and even higher relative to the 0.52% OECD average.The reason is Canada requires higher levels of capital to ensure the solvency of all insurers active in the market, and unlike most developed economies, we lack government mechanisms to share the costs of catastrophic events, such as earthquakes, floods and forest fires.Campbell says the challenge of abnormally high premiums for property will only get worse as the climate continues to shift and the cost of natural catastrophes accelerates.Changes to government policy in the way auto insurance is administered in the outlier provinces and how claims costs from catastrophic events are shared across Canada could make a huge difference to Canadians’ cost of living.Despite having a government monopoly on auto insurance, B.C. has seen premiums noticeably decline since the first study, thanks to a move to a no-fault insurance model."We are already paying more for insurance than anywhere else in the developed world, and we are seeing worsening levels of natural catastrophic events every year,” Campbell says. "Canadians are paying a particularly high price for prudence. We need better public policy in the insurance space — now."
