If Albertans Want Cheaper Auto Insurance Premiums, a Public Monopoly is the Way Forward
Andrew Paulley is a PhD student in Economics at the University of Toronto and a CAMP fellow.
A good rule of thumb is that the more choices consumers have, the larger the incentive for firms to compete by lowering prices or diversifying their products, resulting in better outcome for those consumers.
But recent experience in Ontario’s auto insurance industry has defied those expectations. A market with perceived higher levels of competition has resulted in higher premiums than less competitive markets in other provinces and far higher premiums than the public monopolies in the prairies.
The Wild World of Auto Insurance Competition
At a high level, the world of auto insurance works like this: drivers pay premiums which go to cover the claim costs when accidents occur and the cost of running the insurance business. The payouts to cover claim costs are regulated at the provincial level, defining minimums, tort rights, and other characteristics. As of the latest public figures of 2023, Ontario pays the highest premiums in the country averaging $1,743 a year, with Alberta right behind them with an average of $1,627.
Provincial governments have spent decades tinkering with auto insurance regulations attempting to deliver lower premiums. In 2010 the government of Ontario sought to implement a major change to the structure of coverage requirements with the promise of lowering premiums by 10%. The new regulation set a maximum payout for minor injuries and scaled back disability and healthcare payments to those recovering from an accident. The following year the industry paid out 24% less in claims than the year prior and by a vehicle-by-vehicle basis the industry has never returned to the 2010 peak in the dollar amount of claims paid out. Premiums in Ontario however remained almost unchanged and over the next five years premiums would only fall by an average of 2%. According to my own 2024 working paper on this topic, the policy resulted in firms retaining much of the cost savings and consumers overpaying for auto insurance by $16.6 billion from 2011 to 2021.
One would be tempted to blame this on the oligopolies that are common in the Canadian economy. It is known that oligopolies, where there are only a few firms in a market, can tacitly retain cost savings and avoid passing it along to consumers. But Ontario’s auto insurance industry however does not meet the classic definition of oligopoly. With more than 10 major players, the Ontario insurance market is one of the more diverse major markets in Canada.
This year Alberta has taken the torch of tweaking auto insurance regulations to drive down premiums for drivers after one report claimed 5% of Albertans’ disposable income goes to auto insurance - up from 2.7% a decade ago. Policy makers have been talking a good game on increasing competition to help consumers. But this kind of talk should raise eyebrows since Alberta historically features an odd mix of less competition on paper but also lower premiums than Ontario.
In 2018 and 2019 there were 16 firms in Ontario with a market share of at least 1% and the ten largest firms wrote 87% of policies. In Alberta there were just 13 firms with at least 1% market share and the ten largest firms wrote 92% of policies. What did Ontario win with more players and less concentration at the top in the auto insurance game? 15% higher premiums than Albertans. This was the case even though during these two years the claims paid per vehicle were nearly identical across the two provinces.
Public Power
Instead of chasing “more competition” the Alberta government could deliver for drivers by lowering the legal minimum level of coverage required or make use of a new regulation that allows the Alberta Automobile Insurance Rate Board (AIRB) to force firms to give rebates to drivers if the firm achieves profits higher than 6% of premiums. But these regulatory tweaks come a distant second from an important alternative that has delivered benefits to Canadians in other provinces right next door for nearly 80 years: government run auto insurance.
Unlike other markets where spurious economies of scale claims are used to justify increasing corporate concentration, insurance really is all about scale. More policies per firm diversifies and lowers the average risk level which results in lower average per vehicle costs. This makes the auto insurance market an ideal candidate for a single provider managed by the public. Beyond the value of these economies of scale, public insurers like those in Saskatchewan and Manitoba do not have to return profits to shareholders, further reducing costs to drivers.
While more recent public data is unavailable, in 2020 premiums of the two prairie provinces represented a savings of over $400 annually compared to Ontario and Alberta.
But savings for Albertans could be even higher. This summer a report commissioned by the Alberta government found that if the province was to move to a system matching that of its prairie neighbours the average driver in Alberta would now see an annual reduction of $732 in their premiums.
A public insurance provider would require investment to get off the ground. The cost to the province to transition to a public insurer according to the same report includes $100-500 million in start-up costs and $2.3 billion needed to be held in reserves to cover claims until enough premiums are collected. Alberta Premier Danielle Smith has already signaled that a public provider is not an option, citing the total $3 billion sticker price needed in the first year to start such a venture.
But this view is shortsighted, and premiums would replace the reserves quickly. Even with the expected $732 reduction in premiums, the public monopoly would bring in an expected $2.8 billion in premiums in the first year alone. With over 3.5 million licensed drivers in the province the consumer savings would be well worth the investment.
The differing outcomes across provinces are a reminder of two things. First, tactically stopping savings from being passed onto the consumers can occur even in seemingly competitive markets. Second, where economies of scale really do matter, public options are an important tool for making markets more democratic. Canadians looking for cost of living relief should start taking a public option in automotive insurance seriously.
LiveNation's Proposed New Toronto Stadium Has Some Critics Worried
iHeart Podcast
Jim speaks with Keldon Bester is the Executive Director of Canadian Anti-Monopoly Project (CAMP), Keldon has worked as a Special Advisor at the Competition Bureau.
Live Nation: the giant's dominance raises concerns
CBC Radio
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Letters: The Limits of Transparency
September 29, 2024Welcome to Letters from CAMP, a newsletter on anti-monopoly activity in Canada and abroad, brought to you by the Canadian Anti-Monopoly Project. In this installment we have:
Let's dive in.
In Competition, Transparency is Table StakesThis week the Competition Bureau secured an important win against Cineplex, with the Competition Tribunal handing down a $38.9 million fine for its deceptive marketing practices related to a $1.50 online ticket fee. Known as drip pricing, the charge is that consumers are lured in with an artificially low price, only to face hidden fees at checkout, harming consumers and competitors that are fully transparent with their pricing. The fine aimed to send a strong message to companies engaged in similar practices, calculated to equal the amount Cineplex made through this deceptive $1.50 fee between June 2022 and December 2023. The fine is the largest in Canadian history thanks to recent reforms to the Competition Act, which raised the maximum financial penalty from $10 million for a first violation to up to 3% of a company’s global revenue. But while an important win and a reminder of the importance of transparency to competition, let’s not lose sight of why Cineplex was able to charge the junk fee in the first place. Speaking to CBC, CAMP executive director Keldon Bester notes that it’s a lack of competition that allows Cineplex to charge consumers extra for the convenience of buying tickets online. More troubling than its deception are the practices that Cineplex and studios engage in to limit the kind of competition that would take this ability away. Through exclusionary geographic zones and “clean run” requirements, independent cinemas are unable to screen new releases and compete via, oh we don’t know, maybe not charging people extra for buying their tickets online. As the Network of Independent Canadian Exhibitors (NICE) and CAMP advisory board member Vass Bednar have discussed in the past, this conduct shuts independent cinemas out of competing fairly for movie-going audiences. So, while it’s good to see the Competition Bureau taking on deceptive marketing, the real fight is against the anti-competitive practices propping up Cineplex’s 75% share of the exhibition market. If we really want to help consumers, pushing for greater transparency has to be only the first step towards improving competition in markets across the economy. How Canada’s Obsession with Big Business BackfiredCanada’s economic policy has long been rooted in the belief that bigger is better. For decades, policymakers have championed the need for “national champions”—massive, globally competitive corporations supposed to drive innovation domestically and boost the economy. But as CAMP co-founder Robin Shaban explains in the inaugural post of their new substack Open Mind Economics, it’s increasingly clear this approach has backfired. While corporate giants may spend heavily on R&D and enjoy economies of scale, they also leverage their size to suppress competition, limiting consumer choice and stifling the very innovation they were supposed to promote. Rather than driving a dynamic, competitive economy, these behemoths have used their market power to block new entrants and consolidate wealth at the top. From telecoms to grocery chains, the result has been higher prices and fewer options for Canadians. Worse, the dominance of these firms has hamstrung entrepreneurial growth, making it impossible for smaller businesses to compete. Instead of fostering a culture of innovation, Canada has created a landscape where a handful of large firms wield disproportionate power, both in the market and over policy decisions. Shaban’s critique underscores CAMP’s work to rethink our reliance on a small handful of big businesses as the driver of our economic growth. The future of innovation lies not in protecting the biggest players, but in creating space for new ideas and new competitors to thrive and mount a strong challenge in new markets and against incumbents. Rather than sheltering giants, Canada needs policies that promote real competition, empower entrepreneurs, and limit the ability of those giants to stifle the next generation of innovators. U.S. DOJ Challenges Visa’s Private Sales TaxThis week, the U.S. Department of Justice filed an antitrust lawsuit against Visa, accusing the company of monopolizing debit networks and suffocating competition in the payments space. The numbers are staggering: at roughly 60% of the market, Visa rakes in over $7 billion annually from fees on debit transactions in the U.S. alone. While in Canada the firm faces greater competition for debit card transactions from the Interac network, the company is still responsible for roughly a third of debit card transactions in the country. Because of the nature of payment networks, where there value depends on the number of connections between participants, markets have tended to be dominated by a small number of players, Visa and Mastercard being the most prominent in the West. As a result, jurisdictions like the European Union and Canada have set or negotiated caps on the fees they can charge for facilitating transactions. As antitrust advocate Matt Stoller lays out in his newsletter this week, as operators of what should be public infrastructure, companies like Visa effectively levy a private sales tax on every transaction in the economy. But that Visa is able to charge these fees is not the issue at the heart of the DOJ’s case. Instead, the DOJ is going after how Visa has used anticompetitive conduct to amass market power and protect those fees from competition from new entrants. Canada’s Competition Bureau has tangled with Visa and Mastercard over their treatment of merchants depending on their networks, but at the time the Competition Tribunal slapped down the case saying it was the responsibility of the Department of Finance. The DOJ’s case is a reminder that it may be time to take another hard look at the companies that operate our country’s financial infrastructure. If you have any monopoly tips or stories you'd like to share, drop us a line at hello@antimonopoly.ca |
Watchdog probes suspected anti-competitive policies by largest real estate association
The National Post
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Cineplex hit with massive fine over 'deceptive' pricing
CBC
Cineplex has been hit with a $38.9-million fine by the Competition Tribunal for deceptive marketing practices, accused of misleading moviegoers by adding hidden fees. Cineplex says it will appeal.