Canadians are paying premiums for property and casualty insurance that are at the high end of international comparisons, says a new report from the C.D. Howe Institute.
In The Price of Protection: Benchmarking Canada's Property & Casualty Industry Against its Global Peers authors Alister Campbell and Farah Omran provide a comparison of premiums between Canada and its international peers and explore not only the intriguing reasons why premiums are relatively higher nationally, but also highlight some particularly significant differences between the provinces.
"As can be seen from the results of this first benchmarking exercise, Canadians tend to pay higher premiums for risk transfer than citizens in many, if not most, other developed nations," said Campbell. "This is happening despite the core products being offered by a highly competitive industry with normal claims payout ratios and significantly lower returns on equity. So, the explanations must lie elsewhere."
The authors use OECD data to compare national P&C insurance sector's premiums as a percentage of Gross Domestic Product. They then focus their analysis on the largest lines of P&C insurance coverage – commercial liability (liability insurance for general business risks), property and auto insurance. Finally, they take a deeper dive into the Canadian data, and compare personal property and auto insurance among all provinces and territories.
For auto insurance, three provinces contribute to the noticeably higher average premiums for Canada as a whole: BC, Manitoba, and Ontario. The authors suggest the cause is ineffective government intervention – either in the form of government monopolies (BC and Manitoba) or chronic over-regulation (Ontario).
In the case of property insurance, explanations of higher premiums are harder to identify, but the authors suggest that they are likely due to a combination of naturally risk-averse Canadian consumers, the costs of higher prudential capital requirements and the absence of government mechanisms common in many other developed nations to support consumers facing catastrophe risk (e.g., earthquakes, flooding) – leaving consumers to absorb a higher total share of risk from these types of event through higher risk-transfer premiums.
Finally, the authors note that the Canadian commercial insurance sector – largely unregulated and highly competitive – charges premiums generally in line with other major G7 nations.
"Hopefully, this exercise will prompt, as a starting point, better data collection and reporting, and further research and dialogue, so that we can all better understand this essential – but often under-appreciated – segment of the Canadian economy," said Omran.
Alister Campbell is a 30-year insurance industry veteran. Over the last decade he has served as CEO of two leading Canadian insurers and has built a long track record of driving company profitability and executing on customer-focused plans for growth and market/segment leadership. Over the course of his career he has held senior executive positions in a range of capacities within the property.
Farah Omran is a former Policy Analyst at the C.D. Howe Institute. Farah joined the C.D. Howe Institute in 2017, while completing her Master of Arts in Economics from the University of Toronto. As a Policy Analyst at the institute, she worked on a wide range of topics, including monetary policy, financial services, and fiscal accountability.