Does Alberta’s auto insurance rate cap reward bad drivers?

Alberta’s new 3.7% cap on auto insurance rate increases for good drivers may wind up hurting the province’s well-mannered motorists more than it helps them, industry sources tell Canadian Underwriter.

“Your carrier probably wants to reward you for [being a good driver] in terms of what you’re seeing in your rate, but it’s prevented from doing that,” says Aaron Sutherland, vice president of the Insurance Bureau of Canada’s Pacific region.

“Because now it has to apply this [rate cap] to you and everybody else, versus being able to say, ‘You know, you’re one of the best drivers on my books. You could potentially see a decrease.’”

Using one-size-fits-all solutions directly interferes with rates, he says, as well as how carriers can attract customers.

“Every auto insurer wants the safest drivers. How do they do that? By pricing their premiums accordingly,” Sutherland tells CU. “This cap is preventing them from doing that.”

What the cap does

Implemented on Jan. 1, Alberta’s rate cap is intended to apply to the province’s ‘good’ drivers — which the government puts at 80% of the population. The number is pegged at the province’s average inflation rate as of September 2023, which Alberta notes as “below the national average.”

The government defines a good driver as anyone who hasn’t had:

an at-fault accident in the past six years
a Criminal Code traffic conviction in the last four years
a major traffic conviction in the last three years
more than one minor traffic conviction in the last three years.

But Alberta brought in the cap for good drivers at a time when auto claims costs are soaring for insurers due to inflation, supply chain issues with repair parts, repair labour costs, a reduced supply of rental vehicles, etc.

Canada’s auto insurers say their claims costs are 11% in excess of the 3.7% cap to all drivers in Alberta’s ‘good’ class.

That means all good drivers may wind up cross-subsidizing each other’s rates, meaning insurers will have to cap all good drivers equally at 3.7% to address their claims costs. This leaves very little differentiation between the rates of good, better or best drivers, insurers warn.

“Although meant well, this short-term reform, including the definition of a ‘good driver,’ is very broad and doesn’t address the systematic challenges actually impacting costs related to auto insurance,” Sonja Denobrega, Aviva Canada’s vice president of personal insurance underwriting policy, explains.

“The definition of a ‘good driver’ covers the majority of drivers and is out of step with the policies and protections outlined by other jurisdictions across the country,” she says. “Such broad approaches could result in higher premiums for drivers who fall outside the definition, and they don’t allow us to differentiate pricing based on risk criteria or allow insurers to recognize better-risk profiles.”

What about bad drivers?

So, who would fall outside the definition of a good driver? Bad drivers, of course. But the province’s worst drivers already have their rates capped, insurers note.

Alberta’s grid system applies to the highest-risk drivers, approximately 10% of the province’s auto insureds. The system establishes the maximum rate insurance companies can charge for basic auto coverage – including third-party liability (bodily injury and property damage tort), accident benefits, and direct compensation-property damage.

“Insurance companies must compare a driver’s rate under their current rating program to a driver’s rate calculated by the grid and charge the lesser of the two rates,” Alberta’s Automobile Insurance Rate Board explains.

That means the 3.7% cap doesn’t let insurers charge enough premium from the lowest-risk drivers to cover their costs. And it doesn’t let insurers charge the highest-risk drivers to make up for it. That leaves 10% of the population whose rates are not subject to a cap.

“Those individuals…could see potentially significant dislocation in their rates,” Sutherland predicts. “From a consumer perspective, I would really question the merit of this [cap] policy.”

Cap time?

There’s also confusion around when the cap takes effect. The government officially implemented the 3.7% rate cap on Jan. 1, so Alberta’s good drivers may be under the misconception the cap applies to them right now.

However, they will not see the impact of the rate cap until their insurer makes their next auto rate filing, which varies by insurers. And so, drivers may be surprised to see their rates increase when they thought they were already subject to the cap.

Canada’s auto insurers are still preparing messaging for their brokers to relate to their clients about the reform’s impact.

“This spring is when it will begin to take effect at the consumer level,” Sutherland says. “Some carriers may not be implementing their rates until the summer, so I’d say [there’s] going to be some time before [the cap’s impact] is fully in the system.”

This article is excerpted from one appearing in the April-May 2024 print edition of Canadian Underwriter. Feature image courtesy of iStock.com/Vera_Petrunina