As debate rages on about whether the Alberta government should change our auto insurance to a no-fault system, it’s important to ask – how do these systems work elsewhere?
Variations of no-fault auto insurance is being pushed for by large multinational insurance companies. We know why insurers like no-fault schemes because it saves them money – at least in the short term but do they pass on any savings to consumers?
Let’s take a look at no-fault systems to see.
No-fault insurance is standard with government-run insurance programs (think BC or Saskatchewan). In government-run systems, no-fault insurance can lead to lower premiums. This is because the government can pass on any savings directly to consumers, as it’s not looking to make a profit.
But in private insurance markets, savings are taken as new profit for insurers. This is why Ontarians who have private, no-fault insurance pay more for auto insurance than anyone in Canada.
At best, it’s improbable that the move to a no-fault system lowers our premiums. In 2003, Colorado switched back to an at-fault system after years of no-fault. After 4 years under the at-fault system, premiums had dropped by 32%.
Another horror story? In Michigan last July, some people even saw their rates automatically increase when their premiums got renewed right after the move to a revamped no-fault system.
OK, so no-fault hasn’t worked elsewhere to lower premiums. Why doesn’t it work?
No-fault auto insurance gives the same benefits to everyone – both those who caused accidents and innocent parties hurt by them. Broadening benefits to everyone in an accident without regard for fault greatly increases the pool of those receiving benefits and produces more claims. Yet, in the face of more claims (no matter if actual or perceived), insurance companies raise premiums and offer less coverage in order to protect their bottom line.
The primary reason why premiums get so high is moral hazard and the perverse incentives offered by no-fault. Research describes a “lottery mentality” associated with no-fault thresholds and a claiming culture arising from providing benefits to both at-fault and innocent drivers. The takeaway? No-fault won’t save Albertans money. It’s only here to increase the insurance companies’ bottom line.