Canadian Insurance Reforms Cut Costs Sharply

While political leaders in the United States propose comparatively mild changes in the automobile insurance system, much more sweeping reforms have been adopted in Canada and New Zealand, reforms that strike deeply at middlemen profits and offer consumers less expensive policies.

In Canada, three provinces--Saskatchewan, Manitoba and British Columbia--have state-owned auto insurance monopolies that provide coverage, even in the large cities of Winnipeg and Vancouver, at rates often less than half as much as in metropolitan areas of California. Quebec has a public system for liability insurance only.

By reducing administrative costs, sometimes doing away with commissions paid to agents, discouraging lawsuits and cutting back lawyers’ fees, these systems manage to pay a far higher percentage of the premium dollar to the victims of accidents than is the case in the United States.

In addition, Canada has a law banning age and sex discrimination in auto insurance. Unlike in virtually all U.S. systems, the accident-free 19-year-old driver in Canada pays no more in basic rates than his or her 49-year-old father.

In New Zealand, a state-operated accident insurance plan provides automatic, “no-fault” coverage to all people victimized by automobile or other accidents. Except for limited instances involving punitive damages, recourse to the courts is banned. In California and many other American states, by contrast, more than half of all civil liability claims involve automobile accidents.

Pain and suffering awards in New Zealand are far below those won by successful litigants in the United States, but what is awarded does not, as in the United States, often end up going to pay the lawyers’ fees. And while the pain and suffering payments are lower, everyone who is victimized gets paid, and fairly quickly, rather than just those who litigate or negotiate successfully.

By contrast with these foreign systems, virtually all recent insurance reforms in various states in the United States appear comparatively minor. Some of the states that have adopted the most extensive changes--such as Massachusetts, New York and New Jersey--have the highest insurance rates, so if the object is to keep rates down, they have not been effective.

The directors of the Canadian public systems, interviewed in Saskatchewan and British Columbia, contend that the insurance situation in the United States is approaching the point where public insurance may be adopted here, although probably with important variations.

Tom Holmes, president of the Insurance Corp. of British Columbia, said:

“In the other areas where I have seen the government become involved, it’s when the private sector does not do the job that it’s supposed to. Once that happens, and people begin to feel that they’re being gouged, or it’s not satisfactory, then government is forced into doing something.”

Alex Wilde, president of Saskatchewan Government Insurance, said that when the public grows intolerant of insurance prices and this becomes a major political issue, the companies themselves may begin to look for some government involvement.

Ultimately, added W. Grant Gibson, the vice president in charge of SGI’s Auto Fund, after the government begins providing subsidies or insuring the worst risks, pressure grows for a comprehensive plan covering everyone.

The Saskatchewan official asserted that the strength of the insurance and legal lobbies in the United States would make it impossible to go to a totally public system, but added that a state-organized system of private monopolies--issuing franchises to different companies in different areas--might be an acceptable alternative.

In California, some talk has already begun about an increased state role in auto insurance. Assembly Speaker Willie Brown (D-San Francisco) recently said the Legislature next year will consider the possibility of a state takeover of the assigned-risk plan in a bid to make insurance more affordable for substandard drivers. And Assemblyman Alister McAlister (D-Fremont) has tried unsuccessfully to install features of the New Zealand system.

The organizers of the Canadian public systems say that to them insurance is more than a business.

“It’s a social program,” Gibson said. “We make no bones about that. We used to be embarrassed about saying that, but it’s a government social program like medical care, or minimum public education.”

Part of the rationale for the government role, he explained, is that without affordable insurance, many of those injured in accidents end up on the welfare rolls anyway.

The proudest boast in Canada is that the government bureaucracies have proved efficient.

“Our administrative costs are very low,” explained Pat Monk, spokeswoman for the Insurance Corp. of British Columbia. “They’re 15 or 16% compared to about 24, 25% in the private sector.”

The resulting low rates are what has sold public insurance to the public. In all four provinces that have adopted it, it was introduced by socialist parties, but has been retained by more conservative parties that succeeded them.

James Nielsen, the minister responsible for the British Columbia system, remarks, “I’ll never be a believer in a socialist system of any kind. (But) I’ll accept it, because it’s working, and it’s working well, and it’s being run in a businesslike way. . . .”

These, in summary, are how the public insurance plans operate in Canada and New Zealand:

Saskatchewan--This system, established in 1946, is the oldest and in most respects the cheapest and most comprehensive.

Minimum third-party liability coverage is $200,000, automatic death benefits are $10,000, there is $10,000 in medical benefits above the already extensive Canadian medical insurance plan, and vehicular collision and comprehensive is on a $500 deductible first-party, no-fault basis.

(The Canadian dollar is worth about 72 cents in American money; all figures cited here are in Canadian money).

Payment of Premiums

Premiums, ranging from roughly $370 to $490 (or $266 to $353 in American currency), are paid at the time of annual vehicle registration. All rates are the same, regardless of the driver’s age, sex or place of residence. In addition, for those at fault in accidents there is a $50 surcharge per accident for three years on the basic $15 driver’s license fee. There is also a surcharge for citations. Excess insurance, to bring down the deductibles to $100 or $200, and raise liability coverage to $500,000, costs a little more than $100 and is purchased by about 60% of the insureds.

All cars involved in accidents go to the Saskatchewan Government Insurance claims adjustments centers. The system has its own salvage operation for destroyed cars, where parts are stripped from vehicles and resold. The system also exerts close control over auto body shops, paying them on a scheduled basis for specific repairs.

There are no territorial rate differentials in Saskatchewan.

British Columbia--This system is something of a compromise: Private agents sell the insurance for the public agency, ICBC, and they receive a commission of just over 10%.

There are territorial ratings, with a price differential between urban Vancouver and smaller population centers. But the territories are not as numerous as in California and the differences in price are far smaller.

Minimum Coverage

The minimum coverage required of all motorists is a $200,000 third-party liability policy, which includes first-party rehabilitation, medical costs and income support of $130 a week in case of injury if the victim is a wage earner or a homemaker. It is priced for all cars in Vancouver at about $380. With the 40% discount for four years of claims-free driving, motorists only have to pay $228 for this coverage. About 84% get this discount.

The ICBC president, Holmes, says that 93% of all British Columbia insureds buy excess insurance, covering their cars for collision and comprehensive and, in many cases, for $500,000 or $1 million liability. This costs $500 to $600 for mid-size cars.

Accident surcharges are tacked on to the base rate for all drivers judged at fault in accidents in which ICBC pays a claim. The 30% surcharge for a first accident takes two years to work off, and it is another four years before the driver is eligible for the 40% discount.

The average British Columbia premium was reduced last November by 6.5%. With an investment return on its reserves of 12% a year, and administrative costs of 15%, ICBC is said by its directors to be paying 97 cents of every premium dollar to compensate accident victims.

New Zealand--In 1973, New Zealand banned litigation over accidents arising from injury or death.

Although the courts later allowed a small number of punitive damage cases, compensation for automobile and all other accidents in New Zealand comes through a first-party insurance system, akin to health and disability insurance. Regardless of fault, it pays all medical expenses and 80% of lost income, as well as small lump-sum payments ranging up to $10,000 for pain and suffering resulting from permanent disability.

There are three means of financing the plan: a small annual automobile registration fee, recently $14; a 1.08% premium tax paid by all employers, and a government supplementary contribution out of general revenues.

Termed the Greatest

McAlister, chairman of the California Assembly’s committee on insurance, calls the New Zealand system “the greatest insurance system in the world.”

“In New Zealand 90 cents of every dollar that they collect in the system goes to injured people, in contrast to the American tort system, in which almost any kind of litigation you look at, it’s well under 50 cents of every dollar,” he said.

The Canadian province of Quebec has adopted parts of the New Zealand system. Death and dismemberment benefits are quite a bit higher than in New Zealand. Collision and theft losses in Quebec are left to the private insurance companies.

Representatives of both insurers and lawyers in the United States usually term these systems irrelevant to American problems, saying that traditional American aversion to big government and the power of the industry lobbies in state legislatures make adoption of such reforms here extremely unlikely.

The most common recent reform in the United States has been the no-fault systems adopted in 23 states, mostly in the 1970s. John Rolph, an expert in auto insurance with the Rand Corp., said his studies show that no-fault has worked to reduce the number of lawsuits and court cases.

But it has not resulted in any significant slowing in the rise of insurance premiums, and, as Rolph points out, only a few states--most notably Michigan and Florida--have adopted verbal thresholds in their no-fault systems.

Conditions to Be Met

Under a verbal threshold, a particular set of conditions such as a very severe injury, rather than a dollar amount of damages, must be met before suits can be filed. Where, as in most states, there is only a dollar limitation, parties determined to sue increase their damage estimates to exceed the limit, and the no-fault systems have proved less effective.

Often, as insurance industry spokesmen point out, no-fault proposals were weakened to the point of ineffectiveness by trial lawyer lobbyists.

American reformers have frequently found the results of their efforts, particularly those changing the territorial rating system or instituting greater regulation of the insurance industry, disappointing. Often, the companies and the lawyers seem to find new ways of operating and the reformed systems end up costing consumers even more.

Industry spokesmen scoff at any notion that the United States has something to learn from the Canadian and New Zealand systems.

“In the U.S. . . . where you (hand something) to the government, you end up with an inefficient hodgepodge,” said Sean Mooney, senior vice president of the Insurance Information Institute, a leading industry group.

Mooney contended that about the only savings in going to a public insurance system in the United States “would be the (agent’s) commission. But a lot of the commission is a payment for service.”

Another feature of the Canadian systems, however, is discouragement of lawsuits and large damage awards.

Pain, Suffering Limit

The Canadian Supreme Court has set a $180,000 limit on pain and suffering awards across Canada, and lawyers’ contingency fees are banned in most of the provinces.

Canadians, too, are regarded as less prone to litigate than Americans, and Canadian juries are less apt to give high awards.

Nielsen, the minister in charge of ICBC, summed up a fairly common Canadian view when he said: “In our opinion, the United States is infamous for the outlandish court settlements in personal liability cases. . . . Our system isn’t quite as adversarial.”

U.S. insurers, even while calling for tort reforms as a corrective to their heavy claims and other costs, also take comfort in claims that Americans would never be prepared to accept all the restrictions on their right to sue that have been accepted in New Zealand and Quebec.

“The whole basis and the foundation for that system isn’t mirrored very well, I think, in our situation,” said 20th Century Insurance executive Robert Thompson. He said American expectations for damage awards are too high to allow easy acceptance of a more universal compensation system, but one which compensates at a lower level.

But while both American insurers and lawyers argue that Canadian- or New Zealand-style reforms are out of the question here, those on the scene who are most familiar with the reforms believe that some of them are inevitable in the United States.

Brian E. Stanhope, regional vice president in Vancouver for the Insurance Bureau of Canada, a private industry trade group, said it has to be recognized that in the United States as well as everywhere else, “in 1986, social values have changed considerably.

“It may be that some sort of government intervention in insurance is required now,” said Stanhope. “Insurance has become a social issue.”