What’s contributing to rising auto premiums in Alberta?

Litigation costs stand out as a major contributor to premiums drivers pay in Alberta, according to a new report from accounting firm MNP.

Legal costs in Alberta’s auto insurance system have grown by 31% since 2018 and account for roughly 20% (or $200 for each policy annually) of premiums drivers pay for mandatory coverage, said the report prepared for Insurance Bureau of Canada (IBC).

Released Tuesday, the System Costs and Auto Insurance Premiums report found Alberta’s auto insurance market faces the same challenges from inflation and supply chain disruptions as other jurisdictions across Canada. But claims costs have been rising in Alberta, which has a direct impact on premiums.

“Claim frequencies have been stable or declining across Canada, while claim severity is increasing,” MNP said. “In Alberta, claim frequencies tend to be higher. It has consistently had the highest claims frequency for third-party liability, accident benefits, and collision coverages.”

For example, the average size of accident benefits claims in Alberta rose by 147% in Alberta over the last decade, compared to 53% or less in other jurisdictions. As well, the average size of third-party liability (bodily injury) claims increased 70% in Alberta, compared to 35% or less in other jurisdictions.

The frequency of legal representation for bodily injury claims is also increasing, MNP reported.

“In Alberta between 2018 and 2022 the frequency with which those injured in collisions sought legal representation and pursued a bodily injury claim increased 48%. This is leading to fewer injury claims being subject to the minor injury cap and increasing claim severity.”

iStock.com/Paolo Cordoni

According to MNP, more than $1.2 billion was spent on costs associated with litigation for bodily injury claims between 2018 and 2022. These costs include legal fees and disbursements for claimants as well as legal costs incurred by insurers.

The accounting firm also reported legal costs associated with claims litigation are now more than double the amount provided in a cash payment for pain and suffering for those injured in collisions. Approximately 38% of a settlement goes toward the legal costs of the claimant’s lawyers, while on average, just 15% goes to the claimant for pain and suffering.

“The vast majority of those injured in auto insurance collisions – approximately 80% – sustain relatively minor injuries,” IBC said in a press release. “As highlighted by MNP, Alberta’s one-size-fits-all approach to auto insurance leaves drivers no choice but to pay for these mounting legal costs.

“That’s why reforming the auto insurance system, to give drivers the ability to choose new coverage options that avoid legal costs for minor injuries, is the best way to improve affordability moving forward. IBC has put forward a reform proposal that does this, and would reduce premiums by an average of $200 while doubling the amount of preapproved treatment and care to those injured in collisions.”

IBC says its Enhancing Care & Expanding Choice proposal protects the right to sue while seeing to it that those injured in collisions recover quicker and more fully.

Among the suggested changes are:

Doubling treatment, care and income replacement benefits after a collision
Providing choice if drivers want financial compensation after a minor injury
Removing the 4% insurance premium tax on the sale of every auto insurance policy in the province

IBC previously said drivers’ premiums could be lowered an average of $325 by implementing the Enhancing Care and Expanding Choice proposal, removing the 4% tax and removing or restructuring Alberta’s grid rating framework.

“Alberta does not need to move to a full no-fault model like other jurisdictions – where drivers lose the right to sue – to address the legal costs facing our auto insurance system,” said Aaron Sutherland, vice president of IBC’s Pacific and Western regions.

“But something has to be done to mitigate the impact these legal costs are having on the premiums drivers pay.”

Feature image by iStock.com/RapidEye