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Cause and Effect: Regulation and the Cost of Auto Insurance in Ontario

Release Date: November 16, 2009

The auto insurance industry recently announced that premiums are going up. As expected this has generated political pressure for more government regulation. Fortunately for drivers, the Ontario government instead wants to reduce some of the costs created by its existing regulatory burden on auto insurance.

Specifically, Ontario has decided to lower the minimum required non-catastrophic medical and rehabilitation coverage to $50,000 from the current $100,000. This is not deregulation, but the move will increase the amount of choice that consumers have over the extent of coverage they purchase.

The change is good news because Ontario's auto insurance regulations essentially force drivers to buy more expensive coverage than many people would voluntarily purchase if given a choice. A 2006 comparative study of auto insurance among 10 Canadian provinces, 50 U.S. states and the United Kingdom published by the Fraser Institute found that that in jurisdictions where consumers were given a choice, they typically preferred a lower level of benefit coverage in exchange for lower premiums.

Premium costs also tend to be higher in places where government regulations are more onerous. Across all jurisdictions, a lower burden of auto insurance regulation was statistically linked with lower and more affordable premium costs.

Ontario's experience was consistent with this general finding. Ontario was ranked as the fifth most severely regulated auto insurance market among the 61 jurisdictions studied. The province also ranked as the seventh most severely regulated market in an index of consumer choice in particular. Not surprisingly, Ontario ranked as the eighth most expensive place for auto insurance.

Aside from the potentially unwanted coverage and costs it creates, Ontario's regulatory requirement for medical-rehabilitation coverage under auto insurance is largely redundant.

Under the principles and provisions of the Canada Health Act and the Ontario Health Insurance Act, any acute-care health service deemed by the province to be medically necessary must be paid for through the publicly funded medicare system. In practice, acute treatment for injuries suffered in auto accidents is covered under the provincial health care system.

Catastrophic injuries and long-term disability are also insured separately and can be supplemented by tort awards. So the minimum medical-rehabilitation coverage provisions of auto insurance cover the cost of treating injuries that are not classified as catastrophic, and are not serious enough to require medically necessary acute care.

In fact, the medical rehabilitation coverage mainly pays for physiotherapy following soft tissue injuries like sprains and whiplash. The less serious nature of the treatment paid for through the medical-rehab coverage of auto insurance suggests that there should be lots of room for consumers to decide how much coverage they are willing to pay for.

So why do governments force drivers to buy more coverage than they may want or need?

One explanation is that government regulators are more risk-averse than drivers. When acting paternalistically on behalf of the public, regulators tend to require drivers to over-insure themselves.

Another potential explanation could be that such regulations are politically supported by special interest groups who benefit economically from the requirement to buy extra medical-rehabilitation coverage.

The Canadian Press has reported that the Alliance of Community Medical and Rehabilitation Providers and the Ontario Trial Lawyers Association oppose the province's decision to increase consumer choice over auto insurance coverage. So it is worth asking whether these groups have a potential economic interest in a higher regulatory burden on auto insurance.

It is not hard to see how medical-rehab professionals might potentially benefit from higher coverage limits because expanded insurance coverage allows providers to sell more services and charge higher prices. Trial lawyers might also wish to defend the principle of higher insurance coverage limits in general because higher coverage makes it easier for the courts to justify larger awards and settlements in auto injury cases.

Regardless of the potential political explanations, there is no economic justification for regulating the coverage choices of consumers. Ontario's policy change is welcome, but consumers could be even better off if the government fully deregulated auto insurance altogether.

The evidence shows that as long as private markets are open to competition and consumers have freedom of choice, on average, we should see the lowest possible premiums for any given level of insurance benefit.

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