When insurance becomes expensive, governments are often tempted to cap or freeze premiums. While this may seem helpful to consumers, the reality is that price intervention does not work. It has the opposite of the intended effect – it leads to less choice, makes insurance more costly, and hurts the people it is designed to protect.
Intervention into Alberta auto insurance is now in its third year. The 2023 rate “pause,” which was in effect for one year, was followed by a 3.7% “good driver” rate cap. Instead of expiring, this rate cap will remain in effect for two years, increasing to 7.5% in 2025 and a minimum 5% for 2026.
What has happened since the government froze auto rates and implemented a rate cap in Alberta?
Rate caps = less competition, higher prices
According to a report from Canadian accounting firm MNP, premiums increased 12% over 18 months under the rate freeze and the rate cap. Drivers who fall outside of the rate cap saw their premiums increase by an average of 15% annually.
These increases are the result of auto insurers trying to keep up with soaring claims costs while dealing with the restrictions of government rate intervention. In 2024, insurers paid out more in claims and expenses than they earned in premiums – losing an average of 15 cents for every $1 of premium.
The result is that three insurers have exited the Alberta market, citing unsustainable operating conditions, and others have scaled back their product offerings. Fewer options for consumers can mean increased auto insurance premiums because of decreased market competition.
This is not a new story. It has happened elsewhere, including recently in California, which is a cautionary tale of how bad rate intervention can get.
California – a case study
In response to reduced driving during COVID-19 lockdowns, California imposed a two-year freeze on auto insurance. While this seemed like a win for consumers in the short term, the freeze backfired.
As driving patterns returned to pre-pandemic levels, insurers struggled to manage rising claims without the ability to adjust rates. Several large insurance companies, including State Farm, Allstate, Farmers, USAA and Kemper, announced they were either departing from or significantly reducing coverage in the largest auto insurance market in the U.S.
A lack of competition, combined with mounting cost pressures, led to severe and abrupt premium hikes once the freeze was finally lifted. California consumers were left with fewer choices and higher costs.
We have an opportunity to avoid this extreme outcome in Alberta.
The solution is in government’s hands
The only way to control insurance premiums long term is to control the primary driver of premiums: claims costs.
The good news is that Alberta’s provincial government understands this and is addressing the core problem of claims costs. The Care-First system announced in November 2024 has two important goals – lower premiums and deliver better, faster care for people injured in collisions.
If done right, it can bring savings to Albertans while also delivering greater benefits to help them recover from an automobile accident. Alberta’s insurers are working diligently with government to help achieve this.
Here’s what government can do to ensure the Care-First auto insurance system delivers on its promises:
- Reforms must be implemented correctly – it is essential that they get the legislative and regulatory details right to make the reforms do what they intend.
- Bring in additional reforms that will further address costs.
- And – immediately stop interfering with auto insurance rates and let insurers price based on the risk.
The Alberta government lets the free market – choice and competition – determine prices on just about every other consumer product and service in the province. It’s time to do the same with auto insurance.
Put the power back in the hands of consumers. End the rate cap and all interventions in auto insurance pricing.