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