Insurance for dummies

Lowering auto insurance rates doesn’t involve “rocket science,” Alberta Premier Ralph Klein scoffed last week. To prove his point, he vowed to sit his MLAs down together in the same room one day soon to lower rates for 80% of Alberta drivers. His ideal is one-size-fits-all insurance. “What we want to achieve is comparable levels of premium payments for the middle of the pack so to speak . . . you, me.”

Klein doesn’t want insurance policies complicated by actuarial mumbo-jumbo. Nor is he alone in insisting that auto insurance be dumbed down to a simpleton’s comprehension level. Politicians across Canada are wondering why the aged should pay higher premiums simply because their eyesight is failing and their reaction times are slowing. Or why young single males should be hit with higher premiums to insure their souped-up vehicles. Or whether insurers should have the right to balk at insuring drivers with perfectly valid drivers’ licences, merely because they have had five or six accidents. The only provinces not considering dumbing down their auto insurance are those under public ownership: They’ve already hit bottom.

The dumbing down produces predictable results: More dangerous drivers on the road, higher claims costs, and, all else being equal, higher insurance premiums. Dumbed-down provinces can escape higher premiums, however, by limiting compensation: Alberta, for example, is considering capping payouts at $4,000 to lower the cost of auto insurance. That’s too much for provinces such as Prince Edward Island to fathom. It capped its payout at $2,500.

While Canada is busy dumbing down its auto insurance industry, the United States has been expecting more from its insurers, and getting it. Auto insurance rates south of the border will be falling this year, but not because governments have frozen rates (Ontario) or rolled them back (Nova Scotia) or rebated insurance premiums (New Brunswick) or given Canadians small savings in premiums coupled with big reductions in benefits (most of the rest). U.S. rates are falling because competition has forced auto insurers to provide consumers with more value: more choices, better service, more accurate pricing and lower costs. U.S. consumers like the result. In contrast to Canadians, who dislike their insurance industry whether it’s publicly or privately run, U.S. consumers give their auto insurers a satisfaction rating approaching 90%, and believe that more deregulation – not more regulation – would lead to even lower rates.

Canada’s politicians set up roadblocks to prevent insurance companies from offering meaningful choices. U.S. politicians allow insurers more of an open road, letting aggressive companies such as Progressive and Safeco hit the accelerator. Where these insurers once relied on a few simple factors such as age, sex and driving history to determine insurance rates, they now employ thousands of variables. Many of those variables make no sense to customers – “what does my credit history at Wal-Mart have to do with my driving record,” a customer might ask. Progressive’s answer: “We consider you a higher risk. Others may not.” Progressive, now America’s third-largest auto insurer, provides its rates alongside the rates of other companies – a practice it pioneered 10 years ago – to help consumers compare and decide which insurance product best suits their needs.

Safeco, another new-breed insurer, has likewise transformed its once-dumb business practices, such as putting everyone between the ages of 21 and 70 in the same age category. Now Safeco proudly discriminates: by age, by marital status, by neighbourhood, singly or in combination. Mostly, it discriminates in favour of safe drivers, who cost it least in claims, and who deserve, as a result, the best rates.

In part, insurance is becoming more accurate due to changes in technology. In parts of the United States and the United Kingdom, drivers are beginning to pay for their insurance by the mile – the more they drive, the more insurance they pay. But when and where they drive, and under what conditions, also matters. It costs less to drive on rural roads that have a good safety history than on dangerous roadways, such as congested inner-city expressways. The United Kingdom’s Norwich Union tracks the weather to vary rates by driving conditions – driving on roads that are slippery when wet now comes at a higher per mile insurance premium.

The pay-per-mile schemes set rates by using satellite technology to track the movement of vehicles. To limit their liability, auto rental companies now also make widespread use of tracking technologies – an estimated 25% of rentals are monitored in this way – to make sure their cars aren’t taken across borders or driven dangerously. Some rental companies even fine drivers for speeding to discourage reckless behaviour and lower insurance costs.

The best insurance-lowering innovation of all, however, may soon come from another United Kingdom market-oriented experiment: the pricing of roads. Just over one year ago, London began to charge road users to enter its downtown area. London hoped to lower traffic congestion, and in that it succeeded. To the city’s surprise, eliminating congestion also led to an immense reduction in accidents: 28% fewer cars were involved in accidents and 6% fewer pedestrians. If the safety improvements that London experienced carry through to all U.K. roads when they become tolled in the next five to seven years, U.K. consumers are in for premium reductions. The reductions could also come in Continental Europe, which is likewise developing smart technologies to allow it to toll its roads.

Meanwhile, Canada grows dumber and dumber. Each new interference in the insurance industry convinces either companies to leave, lowering competition, or investors to demand a higher return on their capital. Either way, consumers pay. The savings that politicians promise consumers, meanwhile, are either artificial and temporary, such as when government artificially freezes rates, or nonexistent. Alberta officials now acknowledge there may be no forced savings to be had, and that Ralph Klein may not be able to deliver on his promise.

But Klein does have a way to lower rates, and it doesn’t involve rocket science. He need only move aside and let the insurance market work.

Lawrence Solomon,  May 14 2004


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