Insurance companies should be doing more to support consumers through the pandemic

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The current crisis arising from the Covid-19 pandemic has dramatically reduced the amount of driving by auto insurance policyholders. And it can be expected to have an even more dramatic impact on the number of insurance claims.

Fewer kilometres driven means less time on the road and fewer driver errors. Equally important, fewer vehicles on the road reduces the risk that driver error, when it happens, will lead to collisions, vehicular damage, and bodily injury.

This means that all drivers, even those who have not reduced their driving, face a lower risk of accidents and claims.

The impact of this two-tiered reduction in claims costs has benefitted insurers. And fairness would call for this benefit to flow through to drivers.

In response to these circumstances, on April 8th the Insurance Bureau of Canada (IBC) published a media release, advising drivers “whose driving habits have changed significantly” to “contact their insurance representative” for reductions in automobile insurance premiums.  The release notes that premium “savings will vary depending on individual driving habits.”

This isn’t enough. Not when it is estimated that Alberta insurers are now saving $99 million per month on claim costs.

While the IBC advisory offers savings to drivers who drive less, it does not acknowledge that the risk is lower for all drivers, due to sharply reduced traffic density.

Further, the IBC advisory puts the onus on drivers to apply for the discounts, at a time when service levels are strained.

Some insurers have recognized the lower risk for all by issuing across-the-board premium reductions. The IBC announcement falls short of this measure.

At rates approved in early 2019, the pre-tax net profit of the private passenger auto segment of Alberta’s insurance industry (13%) exceeded the benchmark set by the Alberta Automobile Insurance Rating Board (10%).  Rate increases granted in late 2019 and early 2020 can be expected to increase that level of insurer net income further.

The current reduced level of insurance claims, brought about both by the lower amount of driving and by lower traffic density, can be expected to increase the industry’s profits still further.

If insurers were serious about supporting their customers through the pandemic, they would institute across the board premium reductions for all drivers. What’s been announced so far by insurers is simply a public relations exercise and fails to meet the needs of Alberta consumers or reflect the COVID-19 world where insurers are tripling their profits.

The data: how Alberta’s insurers are saving $99 million a month

The insurance data and analytics firm Arity (founded by Allstate in 2016) has estimated a reduction of 53% in the number of kilometres driven daily in the U.S., between March 8 and April 5. This estimate is based on a sample drawn from 1.5 million users of mobile apps. Thus, a conservative estimate of the claim-cost savings to insurers is 50%, based only on reduced time on the road, and not including the impact of reduced traffic congestion. 

In Alberta, over the 12 months from July 2018 through June 2019, the four automobile insurance coverages for claims involving moving vehicles (third-party liability, underinsured motorists, accident benefits, and collision) generated claims at a monthly rate of $198 million. Thus, in the current crisis, claim-cost savings in Alberta can be conservatively estimated at $99 million a month. These savings, in the absence of other action, will accrue to insurers’ pre-tax net profits, recently estimated for Alberta private passenger auto insurance at $30 million per month (a 13% return on equity).

In comparison to Alberta private passenger insurance premium for these four coverages, $253 million per month (at mid-2019 levels), these savings are 39% of premium.

Coverage  Monthly Claims Cost at 2018-2019 Rate  Monthly Claim-Cost Savings at 50%  Premium at Early 2019 Levels  Savings as Percent of Premium
Third Party Liability and Underinsured Motorists$138 million$69 million$165 million 42%
Accident Benefits$15 million $8 million$14 million 54%
Collision$45 million $22 million$67 million 33%
Total$198 million $99 million$253 million 39%

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