'' Why we pay too much for auto insurance

Provincial government treats ICBC as a buffer to reduce its deficit

The recent government review of the Insurance Corp. of B.C. was useful in exposing the top-heavy and well-compensated management. In addition, it provided a glimpse of other aspects of the operation of our public insurer that call for a more detailed review, such as the reliance upon an independent broker sales force and the growing legal costs of the current claims-settlement model.

One vital component of the current operation was not well explored by the review - the development of a massive surplus at ICBC during the last few years.

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ICBC was established as a break-even, non-profit corporation to sell both mandatory basic (mostly third-party liability) and optional (mostly property and additional liability) policies. By law, ICBC has a monopoly on basic insurance to ensure a large risk pool. From its beginning in 1974 to 2003, the rates for both basic and optional had to be approved by the provincial government.

After the 2001 election, the Liberal government undertook a core review of all programs and Crown corporations. The result of the ICBC review (announced in November of 2003) was that it would continue with the monopoly of basic insurance and that the board of directors would establish the rate structure and the annual premiums for the optional business on the assumption that completion with private insurers would keep the rates at reasonable levels.

The biggest change resulting from the review was that the B.C. Utilities Commission would now be the regulator and rate-setter for basic insurance. The government announced that this change would de-politicize the annual rate-setting process. In 2004, finance minister Gary Collins said that politicians would have to get used to not setting the auto insurance rates to suit the election cycle, and the public would benefit from the open and competitive optional market.

However, apparently the politicians could not let go. Within a year of the changes, the government began to issue a series of cabinet orders that circumscribed the authority of the utilities commission and set capital reserve (profit) targets for both business lines.

The order of 2004 set the basic reserve for basic at 100 per cent of liabilities and the optional target at 140 per cent, both to be achieved by 2014. The targets, it was asserted, were derived from the marginal capital test guidelines issued by the federal regulator of financial companies (although since ICBC was a provincial entity, it is not regulated by the federal office).

Setting the basic target impinged upon the utilities commission's jurisdiction, but the government changed its legislation to preclude any challenge to this move. Thanks to the targets, the impact of prior rate increases, increases in policies written and a moderation in claims and claim costs, ICBC enjoyed a rapid build in its capital reserves.

In 2006, ICBC's reserves were $1.5 billion, or about 45 per cent of the value of the policies sold that year. By 2009 the reserves had ballooned to $3.6 billion, or almost 100 per cent of the policies written in that year. Both the government and ICBC rejected a moderation in the targets; in fact, ICBC raised the basic target to 130 per cent.

Why the surplus was not reduced through a significant reduction in rates is as yet unknown. The fact that the corporation's surplus moderated the growing provincial debt might have been a factor.

What is known is that by 2010, the government was faced with a serious revenue shortfall resulting from the global economic downturn. The 2010 budget papers quietly announced a fundamental change in the objectives of the public insurer and the government booked a three-year, $778-million "dividend."

A dividend is generally viewed as a return on invested capital; however, no government money was invested in ICBC after a $180-million grant in 1975.

If the Ministry of Finance reviewers had looked to the Manitoba Public Insurance Corp., which is similar to ICBC, they would have found a marginal capital test scheme there as well. The difference is that in Manitoba it is expressed as a percentage of premiums written, and in 2010 the basic average was 15 per cent and the optional was set at 30 per cent.

Applying these rates to ICBC's 2011 numbers (after the government had appropriated about $677 million) would show that ICBC had roughly $900 million in excess basic reserve funds, and about $700 million in excess optional funds.

The marginal capital test targets for Saskatchewan, equated to premiums written, are also much lower than in B.C. The calculation of the targets on premiums written, which captures most liabilities, is not unique to Manitoba as it is recognized by the Standard & Poor's and the DBRS rating agencies and the federal regulator itself.

History is also a guide. In the 10-year period before the first targets in 2004, ICBC's capital reserve averaged about 11 per cent of premiums written. By 2009, prior to the government's appropriation, it had reached almost 100 per cent.

The government, as reflected in the recent review, now sees ICBC as a profit centre. Any discussion about this fundamental change in the nature of the public's auto insurer was lost in the clamour over the harmonized sales tax.

When placed in this context, the few million dollars in savings from reducing ICBC's management size and compensation pales in comparison.

Rick McCandless is a retired assistant deputy minister in the provincial government.

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