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.