More than just fraud is keeping auto insurance expensive in Canada

Sometime last year, in the “r/ontario” thread on reddit, user Scottie3Hottie asked a relevant, albeit provocative, question:

“Does Ontario have high car insurance rates because of accidents and fraud or because the insurance companies are legitimately fucking us?” 

Scottie3Hottie’s inquiry is a legitimate one. In Ontario, the average annual cost for auto insurance is now $1,505. Despite having some of the lowest rates of auto-related injuries and fatalities in North America, the province was long home to the highest premiums in the country — until July, when B.C. stole the number-one spot.

High auto insurance premiums are the bane of every driver’s existence. And fraud has long been the scapegoat. It’s something auto insurance companies routinely warn drivers to be vigilant about. Scour the website of almost any Canadian auto insurance company and you’ll probably find a page dedicated to the topic of auto insurance fraud: how to avoid it, how to report it, and an explainer on how it results in higher premiums.

While auto insurance fraud is certainly an issue, especially in Ontario where fraud costs drivers $236 a year, according to the Insurance Bureau of Canada, consumer advocates argue that skyrocketing premiums can’t be blamed on fraud and fraud alone.

Fraudulent claims: rampant and costly for all

Fraudulent auto insurance claims are a big concern — not just for insurance companies, but for drivers as well. 

“Every time there’s fraud, we all pay for it,” says Michèle Pelletier, legislative officer at the Office of the Consumer Advocate for Insurance in New Brunswick “When we say ‘well it’s no problem, insurance is paying for it,’ and they’re paying more than they’re supposed to, they’re going to increase premiums.”

“Here in New Brunswick, we’re still saying that we’re paying too much for auto insurance,” says Pelletier. “But we’re kind of lucky compared to you guys [in Ontario].” In New Brunswick, the average cost for auto insurance is just $843 a year. 

Auto fraud is a major headache for insurance companies, and can take place in a couple of ways: either the driver knowingly presents misleading or false information to their insurer at some point throughout the contract (this could be during the application stage or during the claims process), or fraudsters implicate innocent drivers in sophisticated fraud schemes like staged collisions and thefts. Other examples include ghost brokers selling fake insurance.

The biggest instances of fraud, however, happen with personal injury and medical benefits. Typically, when someone is injured in an accident, insurers will provide large cash settlements instead of providing/covering an injured driver’s medical treatment until it’s no longer needed. This, critics have argued, makes for an environment that fraud can flourish in.

In 2014, a collaborative investigation between the OPP, auto insurance companies, IBC and Ontario’s insurance regulator dubbed “Project Whiplash” charged various rehabilitation clinics in Toronto for knowingly defrauding insurers for whiplash injuries. The provincial government authorized an anti-fraud task force in 2011 to combat the problem.

Fraudulent auto insurance claims cost the auto insurance industry billions of dollars each year, since they’re paying out more in claims than they really should be. These costs then get passed on to Ontario drivers in the form of higher premiums. 

A big problem, but not the whole story

Consumer advocacy organizations don’t accept the fraud explanation full stop. While, as Pelletier says, “fraud is part of the equation,” the reasons for high auto insurance premiums are actually more tangled than that.

For one, auto insurance companies invest the money they collect from consumers, and the returns on those investments aren’t as high as they once were. “They’re making money,” says Pelletier. “But maybe not as much as they would like to be.”

There’s also the fact that distracted driving is on the rise, that newer vehicles are made with advanced technology — making them costly to repair — and that premiums are still largely determined based on postal code.

We also have to consider what insurance companies are spending their money on. According to the Consumer’s Association of Canada (CAC), an independent volunteer-based organization in Ottawa, the insurance industry secretly paid $290 million in commissions in 2003 to property and casualty insurance brokers to send them business. This means brokers would have an incentive to sell whatever policy earned them the highest commission.

CAC’s president, Bruce Cran, said in an interview in 2004 that these commissions “came straight out of consumers’ pockets” and “is one of the reasons why consumers have had to pay outrageous rates for products like auto insurance.”

The structure of privatized auto insurance might also have an impact on insurance rates. In a Globe and Mail article, Peter Cheney writes that in a private market, there are far more overhead costs, since there are multiple companies. Private companies also need to pump money into advertising, since they’re competing with one another.

In an interview with Cheney, Cran was clear: “There are some things that should be run by private industry. And there are others that should be in the hands of government. Auto insurance is one of them.”

Is public auto insurance the answer?

Public auto insurance can offer many benefits that privatized auto insurance can’t — a big one being a uniform price for insurance. But there are benefits to a privatized market, too, namely that it allows auto insurers to compete for consumers’ business, which is a good thing. “We want more companies to do business here,” says Pelletier. “The more the merrier. Then people will have better premiums.”

In some cases, a combination of the two structures can exist. In Saskatchewan and Quebec, for instance, private insurers are still allowed to operate and offer additional coverage for drivers that maybe isn’t covered under the public policy. B.C. and Manitoba, on the other hand, only offer public auto insurance. And in July, B.C. outpaced Ontario as the province with the highest premiums in the country, which forces us to consider whether public auto insurance really is the solution.         

In a report commissioned by the Ontario government in 2016, former head of WSIB, David Marshall, argued that what Ontario really needs is a private system that works more efficiently. Instead of offering large cash settlements to injured drivers, Marshall recommends managing drivers’ medical needs on an ongoing basis and maybe having the government subsidize some part of the process, such as lost wages. 

A little bit of government intervention, in other words, could go a long way. 

Of course, that’s just part of the puzzle. If we can get to a place where insurance companies aren’t losing money to fraudulent claims, big cash settlements, or trying to beat out the competition, maybe they won’t need to keep increasing our premiums.