Insight: B.C. Auto Insurance Deregulation: Anchored?

The B.C. government’s announcement toward the end of last year that it plans to maintain crown insurer the Insurance Corp. of British Columbia’s (ICBC) monopoly position in providing basic auto coverage has left a bad taste in the mouth of the private insurance industry. Insurers had hoped that the newly elected Liberal Party government under its “new era commitment” campaign would pursue deregulation of the basic auto insurance market, which has an estimated value of about $2 billion in annual premiums. Instead, the government opted for what many critics regard as the “easy way out” in mostly maintaining what the same lobbyist groups regard as the “status-quo”. Does this mean that the province’s auto insurance deregulation drive is anchored for good?

The B.C. government’s decision against deregulation of basic auto insurance was primarily motivated by the current pricing and capacity volatility seen in provinces operating under private-sector insurance systems, finance minister Gary Collins noted in a public statement made in late November of last year. The decision was the culmination of an almost year and a half government investigation into the role of the Insurance Corp. of British Columbia (ICBC) and the impact of the state-owned insurer in providing fair coverage pricing to the province’s approximate 2.7 million motorists – the B.C. auto insurance market, including “optional auto insurance”, is valued at just under $3 billion in annual premiums, with the basic auto product accounting for about two-thirds of this amount. “Given difficult market conditions, a rapid shift to full competition on basic [auto] insurance could result in much higher rates for many British Columbians, more uninsured drivers on our roads, and some customers finding it difficult to get any coverage at all…Given current conditions in the Canadian auto insurance industry, a move to full competition on basic [auto] insurance is not an option at this time.”

Private-sector insurers reacted strongly through the Insurance Bureau of Canada (IBC) to the government’s “deregulation halt” announcement, with the bureau’s president Stan Griffin noting, “private insurance companies believed they had been working with a government committed to providing consumers with choice – a choice they believed a Campbell [the provincial premier] government would provide when the B.C. Liberals were elected”. Griffin notes that the government’s message lacked direction and provided no time-line to whether deregulation of auto insurance would even be a future consideration. “We are hopeful that there will be a place at the table for private auto insurers in the not too distant future.”

Repeated attempts by CU to gain an interview with Collins came to no avail. While the government has indicated that auto insurance deregulation is currently not in the cards, many of the proposed changes to the future operation of ICBC remain unclear in implementation as well as timing. The government has until the end of April to prepare draft legislation in this regard in order for it to go before parliament in the Spring session.

Some critics (who preferred not to be named) say that the Liberal government’s seemingly indecisive handling of the auto insurance deregulation issue hardly comes as a surprise. The review of the auto insurance market forms part of a broader privatization investigation into B.C.’s state-owned enterprises with the intent of invigorating the province’s long stagnant economy. So far, the critics note, the government has proposed mediocre changes to the B.C. ferries and liquor retailing industries. In the first instance, the only “notable change” is the shift of control/regulation from one government entity to yet another state-run body, whilst in the latter, the government has proposed moving out of the retailing of liquor but at the same time controlling supply and pricing. “There’s nothing to encourage new investors and therefore new money into B.C.,” observes one commentator.

ICBC’S CORE REVIEW

Following election into office in mid-2001, the Liberal government charged ICBC with conducting a “core review” of its operations in terms of efficiency and market competitiveness. In a cabinet “decision document” addressed to Collins and titled “Core Services Review Outcomes – Insurance Corporation of British Columbia”, the crown insurer recommended that the government approve the following:

Transfer ICBC’s commercial vehicle compliance and motor carrier functions to government;

Move ICBC under the authority of an independent, arm’s length regulatory body; and

Focus ICBC’s priorities on “right pricing” its insurance products and “right sizing” its operations.

ICBC notes that its commercial vehicle compliance functions currently cost about $22 million a year, from which about $12 million in revenue is generated. The corporation proposed that this cost should be removed from its operations. “ICBC’s commercial vehicle compliance and motor carrier operations are a poor fit with the corporation’s core insurance mandate.” The corporation does, however, recommend that the passenger vehicle and driver licensing functions remain within its realm. “Investments are made in loss-prevention initiatives, which result in financial benefits to ICBC’s policyholders from reduced crashes, injuries and deaths.” In this respect, ICBC purports to have the lowest number of uninsured drivers in Canada.

ICBC concedes that past close relations with government have resulted in “political” and not “business” motivated actions. “There is a need to clarify when ICBC is working to achieve public policy and when it is working to achieve business objectives and consumer needs”. Notably, the crown insurer points out that its reserves are presently “significantly below” the regulatory requirements for private sector insurers, which has largely occurred as a result of “politically driven decisions”. For instance, the insurer paid a “pre-election dividend” to government of about $219 million, and had to write off around $140 million based on an investment in the Central City development in Surrey. The “six year rate freeze” the corporation was subject to has also eaten into reserves.

ICBC suggests that, against a backdrop of rising claims costs, pricing and product coverage should be “depoliticized”, and rates set more appropriately to the cost of risk. However, the crown insurer remains against setting rates according to driver age or marital status. “Despite ongoing cost controls, increased premiums will be required to offset claims costs in order to maintain financial stability, as operating at a loss is not an option.”

In its core review document, ICBC recommended against full competition in auto insurance. It notes that such a move would likely cause a “significant rate shock” for some customers, while the government would have to provide an “immediate injection of capital” into ICBC to ensure that the corporation holds up to regulatory solvency requirements. And, the crown insurer observes, “the current state of the [p&c insurance] industry has created an environment in which rapid change in the B.C. market, especially a sudden move to full competition, could have a destabilizing effect, with a significant potential for: uncertainty and chaos for consumers, including sudden rate changes or unavailability of insurance; and substantial fiscal risk to the government”. The core review document referred to auto insurance price adjustments applied by insurers across Canada between September 2001 and September 2002 as evidence of dramatic pricing (see chart).

GOVERNMENT CHANGES

In its announcement from November of last year, the government proposes the creation of an independent regulator for ICBC, overseeing both the corporation’s basic and optional/competitive business. The government expects this will ensure a more “level playing field” in competition between ICBC and private insurers in the optional auto insurance market (ICBC currently holds a domineering position). The government did not provide a time-line with regard to the establishment of such a regulatory body, nor whether the entity would be newly created. Other than Collin’s translucent comment that “full competition on basic insurance is not an option at this time”, there is no clear indication that the government plans on reviewing the competition issue again under more favorable conditions.

While government will “set the mandate” for the regulatory body overseeing ICBC, it says this action will remove any political swaying in determining premium rates. “Political involvement in the corporation [ICBC] has not served ICBC’s policyholders well in the past. We need an independent regulator to provide an open and transparent process to oversee rates without political interference. This will better protect the consumer and ensure fair competition,” comments Collins.

The government also followed ICBC’s recommendation to transfer the commercial vehicle compliance and motor carrier functions back to government. Furthermore, the government approved an average ICBC rate increase of 4.8%, which kicks into effect from the beginning of this year. Personal basic auto insurance rose on average by 1.4% with commercial rates up by about 11.9%.

ICBC ACTIONS

“We’re going to run the company [ICBC] as a business, not a social subsidy,” says Nick Geer, president of ICBC. Geer admits that there are policy and financial problems with ICBC, the most obvious being political interference.

However, over the past 18 months since the appointment of a new board of directors at ICBC in June 2001, the corporation has shaved away about $90 million in annual operating costs, equal to about a 22% saving in expenses. In the core review document, ICBC notes, “while further savings can and will be achieved beyond the 22% reduction year-to-date, they will be much smaller, as the major gains have already been made”. Much of this saving came from scaling the corporation’s staff back by 20%, or 1,300 employees, and reducing leased office-space by about 19% (130,000 square feet). ICBC has also closed three claims centers located in Victoria and the Lower Mainland.

Geer says that the company rationalization undertaken, coupled with the lift on the rate freeze ICBC had previously been subject to by government, will better prepare the corporation should the issue of full competition be raised in coming years. “If at a future date, a different [government] decision is made, we [ICBC] will be in a better position to react. Our whole thrust is to ensure that premiums reflect cost.”

ICBC’s reserves had been depleted of capital as a result of political decisions, Geer confirms. “We’ve taken about $360 million out of our reserves for political reasons. This is why we need to move to an independent regulator.” However, he concurs that having two regulators – one for private insurers and the other for ICBC – is not the most efficient solution. “I agree that one regulator would be a more streamlined process. But, it’s the government’s choice.” He adds that a final decision on whether there should be a separate regulator for ICBC, and if so who/what that body should be, is still open to debate. A final decision is only likely to be forthcoming in the spring when the legislative package is put forward, he says. “We believe that the recommendation [of an independent regulatory body apart from government] will depoliticize ICBC. But, as a state monopoly, it would be stupid to assume that there will be no government influence.”

In addition, Geer defends the need to keep passenger vehicle and driver licensing under the control of ICBC. He believes that the safety programs instituted by the corporation have had a meaningful impact in reducing road accidents. “It’s [driver and vehicle licensing] is a smooth transaction, it occurs in the brokers office, and it’s an efficient process.” That said, he concedes that having a government motor vehicle authority under the Ministry of Transportation that supposedly regulates the use of vehicles and safety, and having ICBC doing the same function does not make sense. “It does make sense for us to hold onto driver licensing. But, in terms of vehicles, there is some debate. We think that we’re doing it [vehicle licensing supervision] more efficiently than the government can.”

IBC POSITION

“You can’t ask insurers to come into the optional auto insurance market as things currently stand, there’s just no way,” says Lindsey Olson, vice president of the Pacific region office at the IBC. Clearly, the government’s decision to opt against open competition is a disappointment, she adds. As such, a first “face to face” meeting has been scheduled between Griffin and Collins.

With regard to the government’s announcement that basic auto insurance will not be deregulated in the foreseeable future, Olson says there are two distinct issues at stake: the short-term impact, and what will occur over the long-term. “In the short-term, the government has decided to leave ICBC intact, and they are trying to encourage competition in the optional product. We’ll continue to work with the government to identify possible solutions.” Looking ahead, Olson says the IBC will be “keeping its eye on the ball”, although there is great concern that the government simply does not have a longer term game-plan. “It’s fair to say that there is a lot of skepticism among our members.”

The biggest problem with the approach the government took in its deregulation investigation was that the process did not seem to follow a logical course, Olson notes. And, of course, the fact that the government asked ICBC to review itself (albeit with so-called outside consultation). Olson points out that both the province’s Insurance Act and the Financial Institutions Act are supposed to be up for review. “I’ve had a hard time understanding how they [government] expected to deal with anything [namely auto insurance competition] without opening up the Insurance Act.” She does not expect that the Insurance Act will be put up for review in the near future, and the current review process occurring on the Financial Institutions Act is unlikely to draw any immediate conclusions. “Clearly there are a lot of things in play here, including the regulatory burden placed on insurers. The government has indicated that it will cut the cost of regulation by a third, and so far nothing has happened.”

Olson says the IBC is opposed to the appointment of a separate regulator for ICBC. In addition to the bureaucratic duplication involved, by not subjecting ICBC to the same regulatory requirements placed on private insurers, particularly in the optional auto insurance market, the concept of having two regulators hardly sets the stage for a “level playing field”.

However, the IBC’s biggest concern is that a new entity will be created to regulate ICBC, which in its own right will have a vested interest in ensuring the status-quo. “There’s no point in creating a body that’s existence depends on the future of ICBC. We think that the government is looking for a regulator that is familiar with crown corporations, and as such, treat ICBC as a kind of utility [corporation]. There has been mention of using the B.C. Utilities Corp. to oversee ICBC, but there’s nothing cast in stone.”

BROKER POSITION

“We’re [independent brokers] overall pleased with the government’s decision [not to introduce full competition at this stage],” says Don Ungaro, president of the Insurance Brokers Association of British Columbia (IBABC). He adds that the association, in providing its input to ICBC’s core review process, had recommended that the government should move slowly in terms of deregulating the basic auto insurance marketplace. “We’ve never been against competitive choice, we just want to make sure that it is done the right way.”

From a broker perspective, the government’s decision to affirm ICBC as the sole supplier of basic auto insurance has an added silver lining. Ungaro confirms that the current “five year accord” agreement that exists between ICBC and the province’s independent brokers will remain intact. Brokers are the sole distributors of ICBC’s products, and have an agreemen t in place setting out commission levels. The current agreement was signed last year before ICBC’s fate was known.

Ungaro believes that the establishment of an independent regulator for ICBC will be effective in removing many of the politically-motivated decisions previously made at the corporation. An arm’s length regulator should also level the playing field between ICBC and private insurers in the optional auto insurance market, he adds, as there will not be the potential for the crown insurer to cross-subsidize its optional rates for competitive advantage.