It’s Time for BC to Privatize Auto Insurance

Auto Insurance Photo source ebony.com

If British Columbians want cheaper automobile insurance and an end to politicized staffing and pay at ICBC, privatize it

By Niels Veldhuis & Mark Milke : The recent revelation from the BC Finance Ministry’s probe into Crown corporations, which found ever-more and ever-higher paid managers at Insurance Corporation of British Columbia (ICBC), has enraged British Columbians and especially consumers of auto insurance in this province.

It is, of course, entirely possible that ICBC, a government-owned monopoly, has too many managers and that they’re paid too much.

However the fact is, without competition to determine how many managers are necessary, no one has any idea what the “right” staffing levels are. In addition, without an independent (non-political) body to set compensation in the public sector equal to that in the private sector for comparable jobs, compensation for managers is determined by politics or the Crown monopoly itself.

Unlike private companies in competitive markets, government protected monopolies are not required to constantly innovate, compete for consumers, ensure efficient and effective staffing levels and pay, offer competitive prices and/or high quality services including more options.

In Canada, six provinces (Alberta, Ontario, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador) rely entirely on private insurers to provide auto insurance. Saskatchewan and Manitoba are much like B.C., in that government-owned insurers have a monopoly over basic auto insurance but compete with private companies in the market for optional insurance coverage. Quebec’s government monopoly for basic coverage does not compete with private insurers for optional insurance.

A 2011 Fraser Institute study comparing automobile insurance premiums found that, from 2007 to 2009, auto insurance has been the most costly and least affordable in British Columbia, Ontario, Manitoba, and Saskatchewan – three of which are provinces with government-run auto insurance monopolies.

Ontario is in that high-priced crowd because of tight regulations (in rate-setting as well as mandatory minimum liability) and high levels of insurance fraud (Toronto has been characterized as a centre for organized crime rings that carry out a number of fraud scams that result in higher premiums).

This evidence contradicts the myth promoted by supporters of public auto insurance who often trot out old reports published by groups like the Consumers’ Association of Canada (CAC) to claim B.C. is a great deal on auto insurance.

The problem with reports from the CAC is that their methodology is not rigorous and has often been criticized. For example, it used internet surveys of possible insurance premiums, not actual policies purchased, to come up with prices in its comparisons. In fact, back in 2003, when CAC’s federal office released its numbers, its then-Ontario director, Theresa Courneyea, called the national numbers faulty and said studies from the national office violated arithmetic and “slant the picture.”

In 2006, even a B.C. Supreme Court judge noticed the CAC’s statistical methods were in error. Justice Loryl Russell wrote that “what methodology can be gleaned from the (Consumers’ Association) affidavit is demonstrably flawed.”

Given the recent ICBC executive pay revelations and the fact that B.C. has among the highest premiums in the country, drivers should be asking why the provincial government continues to restrict competition and consumer choice.

The benefits of privatizing crown corporations are well established in the academic literature. For example, renowned privatization experts Professors William Megginson and Jeffry Netter provided the most comprehensive review of worldwide privatizations in a 2001 study published in the prestigious Journal of Economic Literature. They found both short- and long-term benefits to economies undertaking privatizations. In the short term, taxpayers gained through one-time revenues from the sale of government assets. In the longer term, privatization improved firm performance and increased economic growth.

If British Columbians want cheaper automobile insurance and an end to politicized staffing and pay at ICBC, privatize it.

Niels Veldhuis is an economist and Mark Milke a Senior Fellow with the Fraser Institute.

Troy Media