Kees Krabbe was run over by a car in 1923 in Holland. He was only three years old, and he has no recollection of the event. But his experience parallels troubles in our auto industry.
Fifteen years ago, Krabbe’s back started giving him intense pain. An orthopedic surgeon noticed anomalies that indicated his back must have been injured when he was young.
It took 65 years for his long-term complications to surface. Today, the Calgary senior suffers from severe back problems that will never leave.
The same thing can be said of the invention of the car. Our society was first overrun by cars with the success of the Model-T (introduced in 1908, common by the 1920s). But the costs to our economy’s spine are still surfacing. We have only recently begun to assess the heavy toll automobiles take on the environment, for example. Even drunk driving is only of late starting to get real attention from the courts, lawmakers and carmakers.
The huge costs of the infrastructure required to support cars and trucks is gradually shifting to the users. Worldwide, toll roads, gas taxes and similar user fees are taking over as the means to pay for roads, bridges and such. Rising insurance rates are a logical component of that big picture.
That’s one reason why it strikes me as reasonable that we are facing ever-increasing premiums for our automobile insurance policies. As the true costs of driving a car become clearer, the true costs of insuring them should, too.
Which is not to say this is a simple issue. In fact, I advise skepticism of anyone who suggests that there is either a single cause of dramatically rising premiums, or an easy fix.
Ever since Premier Bernard Lord of New Brunswick came within a whisker of losing his majority in government a few weeks ago – largely thanks to dramatic increases in auto insurance premiums there – other provinces, including Alberta, started seriously re-examining how they regulate and manage the insurance industry.
Alberta is one of six provinces that has a virtually open market for auto insurance. But even here the government caps premiums on personal liability and property damage by making insurance companies justify to an independent board any changes in rates. So, even Alberta does not have a perfectly open market for car insurance.
On July 11, the Klein government announced its intention to study how we might make car insurance more accountable, accessible and fair.
Be afraid. These three goals often conflict with one another. Is a government-run insurance company the solution, as many people suggest? Often, such people are assuming that the “profit” motive of the private sector is adding a hefty premium to rates here in Alberta.
But in order to believe that, you’d have to ignore the non-profit Alberta Motor Association (AMA), which has an auto-insurance arm. It is jacking up rates in virtual lockstep with the for-profit companies. Rob Nissen, a manager with the insurance service department of the AMA, told me its rates are going up by double digits. The rise is therefore not purely profit driven.
Are premium caps the answer, as many politicians have insinuated? The disadvantage with this idea rests in the fact that you can’t force independent companies, whether for profit or not, to provide coverage. So if the rates are set too low, it’s going to be hard for high-risk drivers (especially) to find a company that wants to insure them.
Maybe we should cap payouts, especially for the soft-tissue kind of injuries. But this idea hurts people with less-than-obvious injuries, such as Krabbe, who might be suffering with lifetime pain that only worsens with age. Is such misery worth no more than $2,500, as New Brunswick has proposed?
Perhaps declining or stagnating markets are biting into insurance company profit margins and forcing rates up. The Insurance Bureau of Canada (IBC), which represents the industry players, admits that investment profits have declined about 30 per cent, from a return of eight per cent to 5.6 per cent for the industry, year-over-year.
As Prof. Chris Bruce, an economist at the University of Calgary who specializes in insurance, explained: “It’s been known for a long time that insurance companies don’t make money on people’s premiums. What they do is, they take the premium in and invest it. They make money on the interest they earn while they hang onto the money while people are waiting to make a claim.” So a drop of 30 per cent in those profits can be “pretty dramatic.”
But how to improve that system is hard to imagine. Could government do it better? The Alberta Heritage Fund lost money last year. So has the Canada Pension Plan. Insurance company investments have fared quite well by those governmental benchmarks. Besides, governments are not known for keeping their hands off cash. Most likely, public insurance income would end up in general revenue, just like employment insurance surpluses or gasoline taxes.
But what about the argument that with 60 or so companies competing in the Alberta insurance game, there is inefficient duplication happening that could be eliminated if there were one provincial, publicly administered insurance company?
This seemingly logical question rests on a fallacy. There are 10 provinces and three territories in Canada. If each had its own provincial insurance company, that’s still “duplication.” In fact, it increases duplication, since the insurance companies would still maintain their business in other sectors, and continue offering add-on insurance in the auto sector. We’d just have more duplicators.
But the single biggest premium-increase factor probably relates to the dramatic rise we have seen in total personal injury claims. Jane Voll, director of policy and research with IBC, told me that as the roads have become more safe, as reflected in decreasing numbers of total accident claims in Alberta (-16 per cent since 1993, despite the growing population), the number of injury accident claims has actually risen dramatically. There were 13 injury claims per 100 vehicle claims in 1993, compared to 26 per 100 last year.
Why this dramatic increase in injury claims and payouts?
It’s not at all related to worsening injuries. Prof. Bruce told me the cases with which he deals (the largest) are not getting larger in real terms (inflation adjusted). In his considerable experience – he often works for lawyers to show them how to calculate complex injury claims (over $100,000) – judges are not generally handing out larger settlements. In fact, they’re going down as big settlements are increasingly resolved relatively amicably outside the court system.
I talked with John Townley, a personal injury litigator with Bennett Jones LLP, Alberta’s largest law firm, about the increases. He has noticed the same trend: claims are not getting larger overall, just more frequent. And he sees a couple of big factors pushing up the numbers.
One, the public is becoming aware of what constitutes their legal rights and the advantages lawyers can confer on their clients, partly thanks to education by lawyers themselves. Two, insurance companies are fighting the claims more (the fight itself incurs costs to both sides).
And I would add a third: there is a growing awareness of the long-term consequences of certain injuries, like Krabbe’s. People are no longer satisfied with no settlement or a few hundred dollars when central nervous system issues are involved, such as headaches and backaches. We’ve seen enough cases like Krabbe’s to be wary of what the long-term consequences might be from that “stiff neck.”
All three factors point to the fact that we are no longer a stiff-upper-neck society. We demand compensation when we can.
But there is a factor that amplifies the costs of that societal change, namely a lack of trust. Insurance companies are convinced that fraud is increasing.
The nastiest claims are moderate-sized, but dubious – small enough to put them in a lose-lose situation. If they don’t fight the suspect claim in court, they implicitly encourage more fraud; but if they do fight it, they can incur legal expenses that exceed the claim itself.
As you might expect, fighting such people on “principle” is expensive – there is a negative short-term return on investment.
This trust problem will require a new toughness from lawmakers, doctors and insurance companies to be nipped in the bud, and a special tolerance from already-stretched consumers, who will foot the bill for the added legal costs.
So the prices are going up, and we’d better bite the bullet. There is a high price to pay for our beloved cars.
There is also a stiff, real economic penalty for untrustworthiness.
I hope that in trying to solve these problems, we don’t run over people like Krabbe a second time. (He never received a cent for that 1923 accident.) Let’s encourage a new toughness with fraud.
But not at the expense of the Kees Krabbes of this world.
