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Jack Mintz: Alberta should stop capping auto insurance rates

Preventing companies from covering their costs eventually causes them to leave the market, which many have done since caps came in

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With the recent oil price shock, “affordability” will be as big an issue with Canadian voters as it currently is with American. Which means it will be on politicians’ minds, too. Unfortunately, their first thought for dealing with inflation is often to resort to blunt force: economy-wide wage and price controls (as in the 1970s, another oil-shock era) or sectoral controls like those on apartment rents in five provinces today.

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Wisely, Alberta has so far avoided rent controls. But it has at times imposed market-destroying price controls on auto insurance. Premiums have risen by a third since 2018 and consumers are grumpy about it. The province froze premiums in 2023, capped good drivers’ rates at the inflation rate in 2024, and capped increases at 7.5 per cent in 2025 and 2026, also for good drivers. In addition, for all policy holders, premium increases are capped at 10 and 12.5 per cent in 2025 and 2026, respectively.

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Like all price controls, rate caps result in mispricing risks. Suppose good drivers have a one per cent chance of an accident that costs $100,000 while bad drivers have a five per cent chance. To break even, an insurance company would have to charge good drivers $1,000 (i.e. one per cent of $100,000) and bad drivers $5,000 (i.e., five per cent of $100,000). That would cover the company’s expected cost for each driver type. But if a rate cap results in a good driver paying only $750 in premiums, the insurance company can expect to lose $250 on each good driver’s insurance contract. To break even across all its policies, it would need to charge bad drivers more than $5,000.

But steeper premiums may cause high-risk drivers not to buy insurance. If so, the insurance company may eventually be left with only good drivers. But because the premium it’s allowed to charge them is less than the expected cost of the insurance it’s providing, it will lose money, which it cannot do indefinitely.

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As any economist would predict, over time rate caps will drive auto insurance companies out of the province. Companies can control some of their costs. They can reduce labour costs or increase deductibles. But they can’t control auto parts prices, hailstorms (a major factor in Alberta), theft or the frequency of accidents. Since 2020, 10 of 36 passenger auto insurance companies have abandoned the province. Why? Because permitted premiums have risen only five per cent annually since 2018, falling behind the 7.8 per cent growth in claim costs. Today, claim costs are more than premiums — an unsustainable situation for the industry.

This isn’t happening in provinces that don’t impose rate caps. In the Atlantic provinces, six new companies have entered the market since 2020, bringing the total to 66 (twice the number in Alberta though its population is almost twice Atlantic Canada’s). Ontario has lost none of its 60 auto insurance companies in the past three years. Its companies earn a gross margin big enough to sustain their business.

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To curb the growth in premiums, next year Alberta is implementing no-fault insurance for third-party claims, as well as accident benefits, including for income replacement and pain and suffering. A recent actuarial report estimates that the new system will reduce premiums by about $800 per vehicle in 2027.

But here’s the rub. Because insurance companies are currently losing money on their auto business, they need a higher premium to make up for their losses. The report suggests the average premium would have had to be almost $500 in 2025 if companies were to earn enough profit to stay in business. Once 2027 rolls around, drivers will face average premiums roughly equal to $2,000, little different than in 2025.  If rate caps continue to prevent premiums from covering costs, competition will decline further as companies leave Alberta.

Declining competition does not bode well for consumers. The big question in all of this is why freedom-loving Alberta becomes so concerned about automobile insurance it feels obliged to cap premiums. People’s worries about affordability are one answer. But car insurance accounts for only two per cent of median household income. Food, shelter and clothing are a much bigger share of family budgets and the province doesn’t try to cap those prices.

And though auto insurance is critical for drivers and passengers, Albertans buy life, home and other kinds of insurance to cope with important risks, yet we don’t see price caps for them, neither in Alberta nor elsewhere in Canada.

Rate caps are not consistent with a thriving auto insurance market. As Alberta moves to its new insurance system next year, it should zap the caps. They are not the right road to travel.

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