Gov't Rejects Risk-Based Reform in New Brunswick

Government Rejects Risk-Based Reform in New Brunswick

Driving a Better Deal
National Post
Thursday, July 8, 2004

The last few years have not been kind to New Brunswick drivers. Even as auto insurance costs spiraled upwards, availability decreased -- a counter-intuitive conundrum in a free enterprise economy -- and the consumer was left to figure out why.

Not surprisingly, this produced widespread outrage, and significant pressure on Bernard Lord's Conservative government to do something.

In the spring of 2003, at the peak of the province's insurance crisis, Premier Lord introduced significant reforms, supported by the opposition Liberals, to New Brunswick's insurance policies. The objective was to reduce costs and allow private insurers to price car insurance in relation to the manner in which costs were incurred.

In other words, insurers were permitted to price an individual's policy so that it bore some relation to the risk that person presented when driving. Insurance, after all, is a risk-based product. One pays a premium so that, in the event a loss is suffered, one will be indemnified. It only makes sense for the price to relate in some way to the associated risk factor. Otherwise, the market is totally irrational, and good drivers are forced to subsidize higher risk drivers.

This endorsement of the risk-based insurance system provided the much-needed impetus to restore and increase competition in the insurance market and accounts, to a large degree, for the rapid improvement in availability and price of auto insurance in New Brunswick during the last year.

Given the vision of the 2003 risk-based reforms, and the impressive results in the marketplace, it was surprising to see the government introduce recently what can only be described as a regressive decision to reject risk-based pricing going forward.

Among the changes announced last week is a new mandatory rating structure. Actuarial statistics demonstrate, incontrovertibly, that certain characteristics -- like age -- are very reliable predictors of the risk one presents on the road. It is a truism that parents of 18-year old males may not like, but it is a time-proven one. However, insurers will no longer be permitted to rate according to age-related risk. At least, not in New Brunswick.

As a practical matter, this means that there will be significant rate dislocation in the New Brunswick insurance market, primarilyaffecting good, older drivers and younger females, who will pay markedly higher premiums than they should, given their statistical driving experience.

Furthermore, experienced drivers will subsidize newly-minted ones. As announced last week, insurers will be mandated to offer discounts to new drivers who have undergone driver training, notwithstanding statistical data regarding the greater risk that all new drivers pose.

Driver education is laudable and the insurance industry promotes and supports such programs. But, rather than rely on statistical evidence on the impact of driver training on the incidence of accidents involving new drivers, the proposal is to arbitrarily discount premiums.

Among the significant changes to car insurance announced last week is the bold and intelligent introduction of "no frills" insurance. This is a base product providing minimal coverage as required by statute. Then, there are "bells and whistles" options, which provide enhancements to particular coverage plans, as different families may require.

Many consumers will need and want additional coverage. However, the government requires that the "Cadillac" policy be the starting point. You get it all until you advise otherwise. And, human nature being what it is, the likelihood is that most will accept what is delivered and not question the options.

If the model were flipped, and consumers bought no-frills and built up, they would become better informed about their coverage, and independent brokers and companies would participate in developing a more knowledgeable customer base, which, ultimately, is in everyone's best interest.

Consumers hate what has come to be known as the "negative option" approach, which is what they now have.

New Brunswick drivers should be relieved that government-run auto insurance was rejected as a solution to the very legitimate concerns of the population. The message that private enterprise, when left to manage its capital and investment prudently and responsibly, provides more economic kick and consumer benefits than any government program ever will is a message that resonates among the people of New Brunswick. It is this principled commitment that spurred increasing investment in New Brunswick which in turn catalyzed the province's dramatic economic turnaround during the last 15 years. However, New Brunswick consumers could do better, and so could the government.

There is a strong and undeniable public interest in ensuring that all drivers are licensed and insured. Hence, the government's involvement. However, this involvement invariably leads to excessive political micro-management of the auto insurance that province requires to be purchased.

New Brunswick has demonstrated leadership in responding to what was a dire insurance crisis a mere two years ago. The ultimate prescription to cure the insurance malady is minimal government intervention, combined with optimal industry competition, which will only be achieved with a truly risk-based system.


George L. Cooke
President and Chief Executive Officer
The Dominion of Canada General Insurance Company.

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