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At Issue
Auto-Insurance Rates Catch the Ear of the Bank of Canada
Tuesday, June 10, 2003
There are a few things in life that many of us loathe. Paying bills can be one of those things. It's not so bad when you have to pay a bill for something that you really enjoy. But when you have to pay your income taxes or a fine from a speeding ticket, there is no redeeming value. It's a dead drunk loss, money gone squarely down the drain.Surely, there would be some people who would argue with that. But let me add another bill to the black list. Increasingly, our car insurance bill is sending a ripple through the home finances. The bills have been increasing over the last few years, sending consumers scrambling to compare rates.
So if you've felt victimized by these high rates, there was a bit of good news last week. No, your rates are probably not going down. What did happen was the Bank of Canada launched a review of auto-insurance premiums amid concern that rising rates have become the biggest factor behind Canada's inflation figures.
Auto-insurance premiums have jumped 26 per cent across Canada in the past year, according to the latest figures from Statistics Canada. The bank has held meetings with industry bosses in Ottawa to ask them to explain the big rate increases. It is an unprecedented move by the Bank of Canada. But with rates, increasing up to 60% in some parts of Atlantic Canada, it is having a real effect on the inflation rate.
Catching the attention of the Bank of Canada is no small feat. But auto insurance is one of those things, which seems to consumers to be a license to print money. At the annual meeting of my insurance company held in February, I asked about rising auto insurance rates. It didn't cause much of a ripple at the meeting, but clearly there has been one across Canada.
With the Bank of Canada having the mandate to balance competing forces within our economy, the car insurance bulge has caused a problem. In April, Canadian inflation was running at 3%. This is low on the historical radar screen. But Bank economists estimate that the inflation rates would be 2.1% if not such as rise in auto-insurance rates.
The Bank of Canada controls the money supply and sets interest rates. Part of the balance is to put a lid on inflation. Usually this is done by raising interest rates. At the same time, the bank has its eye on unemployment because interest rates and unemployment usually move in an inverse relationship. But when something like auto-insurance spikes, it's got to drive them crazy. There is not a lot of economic activity generated by collecting auto insurance premiums.
It is also turning into a political football. This past Monday, Premier Bernard Lord almost lost an election, which at the onset he was sure to win. As the votes were counted Monday night, he held a razor thin margin of a one seat over the Liberals and NDP. The issue that sunk Bernard Lord was auto insurance. Consumers had to have someone to blame and it turned out to be Lord. The Liberals and the NDP promised lower auto insurance rates.
With New Brunswick in the background and an election looming in Ontario, will the same type of backlash happen here? Unlike New Brunswick, Ontario has had an NDP government, which promised public auto insurance in 1990. But they backed off over protest from the private sector. But this time around it might find more fertile ground. With rates rising fortuitously, large sectors of the public may no longer be able to afford it. That's bad for our economy.
The insurance industry answers their critics with statistics of grief that seem to make sense. There have been heavy losses in the auto-insurance business over the last few years. Add 911 into the mix, and the whole "risk foundation" underneath the insurance industry has been shaken. This has translated into higher rates across the board.
It's hard to argue with that, but clearly this auto-insurance paradigm is close to broke and needs fixing. Rates need to decline. There is no room for further increases. I think so, the Bank of Canada thinks so and I think maybe even insurance executives think so. It's time for these folks to think "outside the box". New insurance products combined with new technology surely could challenge the status quo.
Raising prices never can be the answer over the long term. The business world is littered with train wrecks, which didn't see that coming. The insurance business is no different. In the next year, there surely will be a raging debate in Ontario between government, insurance executives and consumers. It'll be intriguing to see who blinks first.
Philip Shaw, farms 830 acres near Dresden, Ontario. He holds a Masters of Agricultural Economics and Business Degree from the University of Guelph and is a well-known commentator on agricultural issues in print, on radio and over satellite in Canada and the United States. In the Chatham-Kent Times, Phil will use his frank and forthright writing style to address political and economic issues from the local to the international stage. He is a keen observer of political life at all levels, reads widely and has travelled the world to gather fodder for his column. See what's At Issue this week.
