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Time for a Tune-up
Reforms to Private-Sector Auto Insurance could Lower Costs and Add Value for Consumers

by David Marshall

Series:Commentary No. 619
ISBN 9781989483848
Publication year: 2022

Cdn: $12.00; US: $12.00
Language: English
25 pages
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Key reforms to private-sector auto insurance could yield millions of dollars in savings for Canadian consumers and make auto insurance more responsive to market forces, according to a new report from the C.D. Howe Institute.

In "Time for a Tune-up: Reforms to Private-Sector Auto Insurance could Lower Costs and Add Value for Consumers," David Marshall, who has served as a Federal Deputy Minister and Senior Advisor to the Government of Ontario on auto insurance and pension funds, proposes reforms that provincial governments should adopt to improve the cost and value of auto insurance in Canada.

Auto insurance for personal injury and auto repair is either delivered through a government-run agency (Manitoba, Saskatchewan and Quebec) or through private-sector insurers (the Atlantic provinces, Ontario and Alberta) with the coverage in each province differing significantly. However, since the offerings delivered by insurers in private-sector provinces are government-designed and controlled, Canada does not really have a private-sector insurance product.

"Among the provinces, those who provide auto insurance directly through a government agency appear to provide better value for money, particularly for personal injury coverage, than those with private-sector delivery," says Marshall. "However, the higher costs for personal injury coverage in the private-sector provinces are not caused by private-sector insurers being inefficient or making excess profits. The main reason for the challenges in private-sector delivery provinces is the faulty design of the insurance product, which governments have imposed on the private sector, as well as excessive government regulation."

These five faulty design features include: a complex product design with open-ended commitments to restoring the injured person to his pre-accident condition; a misaligned healthcare delivery system that exposes private-sector auto insurers to paying for overtreatments, unnecessary treatments, and potential fraud; lump-sum cash settlements to claimants in lieu of paying for specific medical care; excessive regulatory burden; and inadequate provision for seriously or catastrophically injured victims.

Marshall explains that there are fundamental reasons for government-run systems' lower cost base, such as the fact that they are single-player empowered agencies that pursue active management of healthcare costs and do not have to cope with tort claims. Although government agencies currently provide better value than private insurance, they are not responsive to market demand and their premiums can understate true costs from time to time.

Ultimately, Marshall recommends that private-sector provinces do not switch to government delivery systems. "Notably, there is a risk that at some point, governments will interfere through their agencies to pursue political goals that distort the price/value of the insurance product. The future lies in being responsive to rapid changes in consumer needs, especially when it comes to features such as pricing and innovation," says Marshall.

His principal recommendations for private-sector reforms include a series of measures to reduce fraud and waste in the system, and increase consumer choice while maintaining sound medical coverage for personal injury. Among them are:
  • Measures to remove the open-ended commitments in the insurance product and replace them with clear entitlement and benefit criteria;
  • Abolishing lump sum cash settlements;
  • Restricting lawsuits to only the most serious cases;
  • Increasing consumer choice in selecting benefits;
  • The need to review the restrictive practices of manufacturers that drive up car repair costs and a recommendation to use only certified repair shops to reduce fraud and effect safe and efficient repair;
  • Substantially increasing the no-fault entitlement for catastrophically impaired accident victims, and;
  • Reducing regulatory burden to allow the private sector to compete on innovation, price, and value.
David Marshall has served as a Federal Deputy Minister, and Senior Advisor to the Government of Ontario on auto insurance and pension funds. He currently consults on financial management. Previous roles include Assistant Auditor General of Canada, diplomat, Vice Chairman of CIBC, and President and CEO of WSIB.
Time for a Tune-up
Cdn: $12.00; US: $12.00
C.D. Howe Institute / Institut C.D. Howe BookID: 129348 Added: 2022.3.27