Gerard Lucyshyn is a senior economist at the MEI, a think tank with offices in Calgary, Ottawa, and Montreal.Car insurance is one of those things we all like to grumble about: nobody likes paying for it, but we sure are glad to have it if we get into an accident.Unfortunately, government intervention in the automobile insurance market has left Albertans with less choice and less extensive coverage these past few years. Ahead of the new insurance regime the provincial government is looking to implement, it’s important that it learn from its mistakes.For the past decade, governments led by both the United Conservative Party and the New Democratic Party have meddled in the market by introducing rate caps — essentially “capping” rate increases at a certain maximum level.As consumers, this might seem like a good idea at first glance. After all, who wants to pay more, right?Unfortunately, the long-term effects of such rate caps are particularly detrimental to consumers.The way insurance companies price their products is a reflection of the perceived level of risk. The riskier the insurance pool, the more expensive it is to insure, and the higher the premiums motorists are charged.In properly functioning insurance markets, premiums are thus adjusted regularly as risk increases or decreases over time.When the government imposes rate caps, though, it prevents premiums from naturally adjusting based on risk..This leads to insurance companies’ expenses rising faster than their revenues.Following the Notley government’s rate cap, for instance, some automobile insurers found they were paying $1.30 in direct costs to provide insurance for every dollar in premiums they received from Alberta drivers.A similar situation occurred with the Smith government’s 2023 rate pause and subsequent “safe driver” rate cap.During the rate pause, it was estimated that one in three automobile insurers lost money providing their services in Alberta.But when the rate pause ended, caps prevented premiums from adjusting to rising costs, worsening the situation. On average, automobile insurers paid out $1.18 in costs for every dollar in premiums they earned in 2024. This represents a $1.2 billion shortfall for auto insurers for that year alone.Unsurprisingly, some insurance companies opted to simply stop providing car insurance in Alberta. In 2024, it was reported that Sonnet, S&Y, and Zenith decided to close up shop and no longer provide automobile insurance products to Albertans, citing rising costs and no return to profitability in sight.The fact that these three insurers left the market illustrates one of the pernicious effects of such caps on consumers: they reduce choice and competition.As insurers leave the market, those who remain have less incentive to innovate on products or be more aggressive in pricing. The effects of that loss of competition are compounded by the diminished returns on insurance products, which force insurers to adjust to remain afloat..These adjustments can take many forms. One such form would be to drop or reduce coverage in existing pools. This could mean higher deductibles, so that you would have to cover a larger share of the cost of any repairs.It could also lead insurers to become more selective about the clients they accept. After all, if premiums can’t be adjusted based on risk, one way for an insurer to maintain viability is to lower its risk pool to a level that fits with the premiums it is allowed to charge. That would mean having more uninsured drivers on our roads.Or it could mean seeing insurers become much stricter with claims investigations, so that they would be more likely to find a reason not to cover the bills you submit for car repairs. None of these adjustments are positive for consumers, who rely on these products for peace of mind while driving.Rate caps have already hurt Alberta’s insurance market enough. It’s time for the Smith government to make them go the way of the dodo bird.Gerard Lucyshyn is a senior economist at the MEI, a think tank with offices in Calgary, Ottawa, and Montreal.
