Does Car Insurance Have To Cost So Much?
Canadians now pay almost as much to insure cars as to build highways for them, yet the major companies say they’re still losing money. Here is an examination of the reasons — and a look at the controversial question of state insurance
NOWHERE in the vast, and complex Canadian business scene is there a commodity that is producing more grief, beefs and stomach ulcers than automobile insurance. The man who buys it is unhappy; since the war the rate he pays has nearly doubled until now the nation’s annual lull is a hundred and fifty million dollars, almost as much as its annual bill for highway construction. The man who sells it—usually an independent, agent working for himself in the role of retailer—is unhappy; his rate of commission has just been cut by a quarter. The companies that underwrite it in the role of wholesaler are unhappy; they’re losing money on it, they claim, and can see no way of getting out from under without issuing a tacit invitation to governments to take over the whole insurance business, the profitable lines along with the lines that show red ink.
Consumer, agent and underwriter can’t agree either on the root of the problem or its solution. (On one point the disagreement has become so violent that the Canadian Federation of Insurance Agents is demanding an investigation under the Combines Act. to determine whether the underwriting companies have broken the law in acting together to knock down commissions.) But there’s at least one point of view that’s apparent to everyone: accident claims are soaring so
fast that the customer’s skyrocketing premiums can’t keep up, even allowing for reduced profits or losses to the companies and lower commissions to the salesmen.
What is auto insurance? Why does it exist?
The moment you drive your car on to a public street you assume two sets of hazards. The first is damage or injury you may cause to your own car, yourself or passengers. The second hazard is that you may become responsible for the death or injury of a pedestrian or occupant of another car, or for damage to another vehicle.
The first hazard is a relatively minor one. Passengers traveling free cannot usually sue drivers for injuries, and if
you wreck your own car you can probably get along without it for a time.
But that second hazard can turn the average driver into a slave. A moment’s negligence may which one or more persons are killed. If man with dependent family, a court may
caused the accident to pay medical and all immediate expenses, and also what the victim might have expected to earn had he lived his normal span of life. Jury awards of fifty thousand dollars are not uncommon. Occasionally they go over one hundred thousand. Property and bank accounts can be confiscated and wages garnisheed for years until the claim is paid.
Insurance companies provide four different types of car insurance contracts. The biggest hazard, that of causing injury or death, or damage to another vehicle, is covered by “public liability and property damage” policies. The policy always carries limits beyond which the company refuses to pay—the higher the limits, the higher the premium. Known as “standard limits” is the “five, ten and one” policy—up to five thousand dollars for liabilities incurred from death or injury of one person, up to ten thousand if more than one person is involved, and up to one thousand dollars for property damage. These limits can run up to the “hundred thousand dollar inclusive” policy which provides protection of a hundred thousand dollars for damages assessed in any one accident. This “PL and PD” policy, remember, doesn’t cover the insured’s own car or hi« own skin, it’s his protection against what he might do to another car or user of the highway ,
For lus own car there are fire and theft policies jjjftjph insure against practically everything that can happen
llision. Then there is collision insurance, cov^^d damage to the motorist’s own car which he himself Collision insurance always carries a “deductible” relieve insurance companies Continued on ¡xtfíe 28
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from paying every trivial claim. This clause also relieves the insured of an even higher premium rate. Most common is “hundred-dollar deductible,” which means the customer pays the first hundred dollars, the insurance company pays the rest.
The motorist, striving vainly to strike a balance between soaring insurance costs and high court awards for accident victims, has a dilemma. What and how much auto insurance should he carry? Or does he need any at all?
If a man has a fat bank account and likes a gamble, there’s no reason why he can’t be his own insurance company and shoulder the financial hazard of his own driving instead of paying a company to do it. But the risk should not be underestimated. According to insurance statistics the average driver can expect to have an accident once every six years in which he will he liable for damages. The average claim is around two hundred dollars, but there is always the chance that court awards may run to more than a hundred thousand.
A Toronto woman was held responsible for an accident which sent an eighteen-thousand-a-year engineer to hospital for two and a half years. A court ordered her and her husband to pay the engineer one hundred and fifteen thousand dollars. They had public liability insurance with a fiftythousand-dollar limit. Their insurance company paid up to that policy limit —which left sixty-five thousand dollars still to be paid. The most the couple could raise was twenty-five thousand and the case was closed with payment of this amount.
In another case a woman who owned a hotel in London, Ont., was assessed eighty-nine thousand dollars for a collision which injured four persons. She had to sell her hotel to pay the debt. A recent Vancouver accident judgment was forty-six thousand; another in Hamilton was fifty-five thousand.
Government-established “unsatisfied judgment funds” now exist in all provinces except Saskatchewan and Quebec, but they don’t take the place of insurance for the individual motorist. They protect accident victims, not drivers responsible for the accidents. If a driver has no finances or insurance to pay a court judgment the victim can be paid out of the unsatisfied judgment fund. But the driver’s car is impounded and his driving license canceled until he pays the sum back to the fund.
So most car owners regard public liability insurance a necessity. The question is, how much?
In prewar days when earnings, medical costs and car values were much lower than today, the “five, ten and one” policy was regarded as fairly adequate coverage and became known as “standard limits.” If you’re a Sunday driver who runs up only three or four thousand miles a year you may feel that standard limits are still enough. But insurance officials say the average public liability coverage today is twenty - five thousand dollars for injury to one person, fifty thousand for more than one, and two thousand to cover property damage. Because the risk of bigger claims is smaller, the rates for higher limits drop sharply. The average Toronto driver pays around twenty-five dollars a year for a “five, ten and one” public liability policy, but for another nine or ten dollars he can have maximum coverage of a hundred thousand dollars. Thomas N. Phelan, legal adviser to the Ontario Motor
League, believes the “hilndfed thousand inclusive” policy is worth the extra premium cost to all motorists, regardless of how much driving they do.
Do you need fire and theft coverage? It costs only five or six dollars a year, but rates for an old car are practically the same as for a new one, so if your car is an old-timer you may decide its loss won’t bankrupt you and let fire and theft coverage slide. But the average motorist has to dig deeply to pay for a new car—usually it’s his biggest investment next to his house —and for him fire and theft coverage is worth the price.
The hardest auto-insurance decision involves collision insurance covering your own car against damage for which no other driver is responsible. This is the most expensive coverage, rates for which are three to four times what they were six or seven years ago. (For a new Ford in 1946 they were ten to fifteen dollars, for a 1953 Ford they range from thirty to sixty dollars.) Mayhe this is the closest to being a “luxury” insurance, for if you wreck your own car you can always take up hiking. Sixty percent of Canadian motorists do not carry it.
But the big insurance question is not what and how much to buy but why it is costing so much.
The rates across the board have risen roughly eighty percent since the end of the war, although at war’s end they were slightly lower than usual because the accident rate had dropped during wartime gasoline rationing. The average Canadian car owner today is paying seventy-five dollars a year for auto insurance; he used to get the same coverage for around forty dollars. The increases have been greatest during the past three years and there’s slim hope yet of them even standing still, let alone retreating.
Three Ways To Buy It
With increasing rates, the insured drivers must worry too about a threatening increase in the number of uninsured drivers, for as rates go up so does the number of drivers who can no longer afford insurance. Twenty percent of Canadian cars—more than half a million — carry no public liability insurance; in Quebec where rates are highest because the accident rate is highest, seventy percent of cars are uninsured. Unsatisfied judgment funds are only a partial protection against uninsured drivers. The time and trouble of obtaining a court decision make small damage claims uneconomical. And most of the funds have the “standard” limits and therefore don’t pay large claims.
Motorists are learning to their bewilderment and suspicion that there are three basic ways in which auto insurance is being sold in Canada, and that virtually the same coverage can vary a hundred dollars in annual cost, depending on who sells it to you and where you live. Principal purveyors of auto insurance are the established insurance companies which handle more than ninety percent of the Canadian business and sell indirectly through independent agents. A second type now beginning to appear in Canada is the “direct-writer” company. Direct writers sell either by mail or from their own offices in which they have exclusive agents who work for reduced commissions. The third Canadian system of dispensing auto insurance is the Saskatchewan Government’s compulsory plan under which every motorist there pays for his insurance when he buys his driving license.
How do their rates compare? Forfairly full coverage (“hundred thousand inclusive” public liability, “hundred
dollar deductible” collision, and fire and theft) a Toronto or Hamilton motorist with a 1950 Ford pays the regular agency-type companies about seventy-two dollars on a pleasure car, one hundred and thirty-five dollars if he uses it for business. A direct-writer company sells the same coverage for seventy-seven dollars for the first year, sixty-four dollars for succeeding years, business or pleasure regardless. In Saskatchewan this same coverage sells for thirty-one dollars, with no extra charge for business cars.
A comparison of Saskatchewan and Toronto-Hamilton rates is unfair in one respect, for the accident rate influences insurance costs, and highway congestion makes the Ontario accident rate much higher. But in Manitoba, with an accident rate similar to Saskatchewan’s, the protection listed above and bought from a regular company costs sixty - five dollars — more than double the Saskatchewan cost. This comparison, too, is misleading, for the Saskatchewan plan is indirectly subsidized.
Whether or not premium rates in general are higher than they need to be, there is at least plenty of reason for them to be higher today than in prewar days when inflation applied only to automobile tires and not to automobile expenses.
First, there are more cars on the road and the congestion has produced a dramatic increase in the accident rate. In 1939 accidents occurred at the rate of 2.8 for every hundred cars regis-
tered; in 1952 it was about seven per hundred cars. More accidents mean more insurance claims and higher premiums to cover the claims.
But the real villain is inflation. In 1939 the replacement price of a typical low-price car was eight hundred and fifty dollars, today it costs two thousand, two hundred. Repair parts have increased proportionately. Garage labor used to be around a dollar an hour, now it’s anywhere up to $3.50. And cars are being dolled up in a way that adds greatly to cost of repair. As one insurance company president laments: “If you smash a fender today
you have to repair half the car.” In hundred-dollar-deductible collision insurance, there were three claims per hundred cars insured in 1939 (average claim: $178); in 1951 there were more than nine claims per hundred cars (average: $276).
The cost of accident injuries has also soared, for medical and hospital costs are two to three times as high. And increased wages have doubled court allowances for lost earnings.
Insurance officials also claim there is a growing tendency for juries in damage actions to “soak the insurance company”—so much so that insurance lawyers now try to hide the fact whenever there is an insurance company behind a case. Motorists and garagemen are also getting “claim-happy,” company adjusters say, and playing the insurance companies for a rich uncle whenever they get the chance.
Accident claims, inflated by all these
factors, have increased steadily. In 1950 they were $52 million, in 1951 $65 million, in 1952 $76 million. At present accident claims are costing insurance companies—and drivers who pay the premiums—around one hundred and fifty dollars per minute.
But, since premium rates are also soaring, are the companies really losing money as they claim?
According to W. C. Butler, president of the All Canada Insurance Federation, to which almost all companies in Canada belong, the companies lost about six million dollars on auto insurance in 1952. But practically all of the two-hundred-odd firms doing auto underwriting in Canada are “multiple-line” companies which also sell fire, sickness, accident and various other lines of insurance. Despite their claimed auto insurance losses, they always chalk up a robust profit every year on their total insurance business. According to the report of the superintendent of insurance for Canada, the companies made a 1951 profit of about twenty million dollars. So the auto underwriting loss still has a long way to go before it starts breaking the companies.
But no one argues that a company should indefinitely subsidize its automobile insurance division on profit it makes from the man buying boiler or burglary insurance. So what is the evidence that there is an automobile insurance loss?
/ Companies Go In Red
In the form of hard, round figures the evidence is lacking. The U. S. Government requires insurance companies to break down expenses by class of insurance so that each class can be inspected individually. No such detailed breakdown is required in Canada. So when the companies say that thirty-seven cents out of every auto insurance premium dollar is required for commissions, wages, taxes and all the other expenses of doing business, leaving sixty-three cents to pay claims, the government and everyone else must take their word for it.
“Expenses are the unknown factor,” one government official said. “They claim they are losing money but figures on the whys and wheres of that loss are mixed up with other insurance lines so that no one can find them.”
Recently the Canadian Federation of Insurance Agents, fearing that the public was blaming agent commissions for premium increases, urged government insurance departments to demand more revealing expense figures in company reports.
In the meantime, there is some strong evidence in support of the companies’ claim that most of them are going in the red on auto insurance. For example, there are a handful of firms which sell only automobile insurance, so with them there are no other lines of insurance to confuse the profit-andloss picture, and these firms have all lost money or barely broken even during the past few years. The biggest, American Automobile, showed a loss of 12.6 cents per income dollar in 1951, and 4.1 cents in 1952.
And many companies are curtailing their auto insurance volume or getting fussier about the people they will insure. Some have become very selective, refusing to take on young drivers or drivers with accident records. Others are accepting new policies from agents only on a rationed basis, demanding a certain number of fire or other policies for every auto policy they accept—-not exactly the action one would expect in a profitable business.
Is too much of the premium dollar being used up in company expenses
and agents’ commissions? In the lush days of 1929 when an automobile accident was so rare that it was almost always worth an eight-column newspaper heading, a Royal Commission investigating the auto insurance business recommended a division of the premium dollar into fifty-three cents for claims, forty-seven for commission, profit and expenses. It didn’t become law, but the companies accepted it as their formula for arriving at rates each year. Their way of doing business became geared to this system which allowed them to use up forty-seven cents out of every dollar they handled.
But at the end of the war it became impossible to hold claims down to fifty-three percent of premiums collected. Premiums had to be set according to claims of the year before, but claims were going up so fast that premiums, always a year or two behind, couldn’t catch up. The “loss ratio” —the portion of premiums required for claims—rose from the original fiftythree to around sixty-five percent. Companies that had been doing business for years with the old forty-seven percent expense allowance were having a tough time making ends meet on the thirty-five percent left to them now.
This year they decided premiums couldn’t keep going up forever and that company expenses and agents’ commissions would have to be cut. Now they are aiming at a division of the auto insurance premium dollar of sixty-three cents for claims and thirtyseven cents for commission and company costs. That thirty-seven cents is now divided twenty-two cents for the company, fifteen cents for the agent’s commission. But they claim that in spite of the ten percent reduction in expenses and commissions they may still go in the red.
Is the only alternative still higher premiums? Or can expenses he trimmed yet?
U. S. companies absorb only fifteen percent of premium in company expenses instead of the Canadian twentytwo percent. James Matson, in his address as retiring president of the Dominion Board of Insurance Underwriters, said last May: “I see great
scope for simplification in our business.” Expense-saving short cuts being discussed within the industry include simpler policy forms, twoor three-year policies instead of annual renewals, less detailed bookkeeping.
But the companies overlook one form of income which they claim doesn’t belong in the profit-or-loss picture —income from investments. They are required by law to hold a fund in reserve to cover what they call “unearned premiums.” The premium paid, for example, in June is only half earned when the year’s business is wound up, and the unearned portion must go into a reserve that is invested.
How much of the reserve funds is unearned auto premiums, and how much from other insurance lines, only the companies know. But the total reserves, reported each year for government solvency investigations, are large. At the end of 1951 the firms were holding reserves of more than sixty-two million. That year they had an investment income of $8,600,000. How much came from auto premiums they don’t report, but auto premiums represent about one third of all premiums collected .
The companies have said that investment income is too uncertain to be considered in the calculation of insurance rates. But life insurance companies include investment income in their premium - setting calculations. The casualty companies reply that life insurance firms hold premiums for years before a policy becomes a claim, and
the reserves become much larger and the income more stable in short-term insurance lines.
How have direct-writer companies and the Saskatchewan Government been able to sell auto insurance at lower rates than the standard companies? Direct writers, who sell auto insurance at ten to twenty percent less than the regular companies, are not yet firmly established in Canada, but in the U. S. they have cornered about half of the auto insurance business. Until this year there was only one in Canada —State Farm Mutual, a U. S. firm licensed to do business in Ontario. But last April the biggest U. S. direct writer - Allstate Insurance Company, a subsidiary of Sears-Roebuck, the world’s leading mail-order house—opened shop in Canada as a result of the partnership of Sears-Roebuck and Robert Simpson Company in the new Simpsons-Sears Company. Allstate has opened a booth in Simpson’s department store at Toronto and plans to establish auto insurance departments in Simpsons-Sears stores across Canada. Allstate also sells by mail through the Simpsons-Sears catalogue.
Direct writers cut costs by eliminating independent agents and making the purchaser come to them. Their office salesmen get a fifteen percent commission on new business, but only six-anda-half percent on renewals. No commission is paid on mail business. ’They are more selective than regular companies, and eliminate much office detail by filling in a simplified policy form by pen while the applicant waits.
The older auto insurance firms are viewing the direct writers with an alarm verging on panic. They fear that the impersonal direct-writing system will result in poor service, especially in the mail-order business, and create a public ill-will that will reflect on the whole industry. They claim that the direct writers are cutting their own and everybody else’s throats when they economize by turning away all but the best risks. Somebody has to insure the poor risks, the companies say, or there will be an army of uninsurables raising such a howl that the government will have to take over the business lock, stock and barrel. Then the direct writers and everybody else will be out of business.
But the agency companies are being forced by competition to study the economizing methods of the direct writers. “If they can operate at less, we’ll have to,” says Herbert Wittick of Pilot Insurance Company, an actuary and former insurance association official. “Either they’re stupid, or we are.”
Flow does the Saskatchewan Government’s auto insurance, the cheapest in the world, sell for a third to a half less than similar coverage elsewhere?
Being compulsory, there are no commissions or selling machinery involved. The premium is simply paid for each year with the driving permit. C. M. F'ines, provincial treasurer and chairman of the Saskatchewan Government Insurance Office, attributes the low rate to this simplified system of collecting premiums and to the absence of profit.
But insurance company officials reel off half-a-dozen other explanations for Saskatchewan’s “dirt cheap” insurance: Saskatchewan has no congested highways, a low accident rate, and a low average wage. These reduce the frequency and size of accident claims. Its auto premiums don’t have to cover hospital costs because the province also has a compulsory hospital insurance plan, which operates at a loss and is subsidized from general provincial funds. In other provinces hospital bills are one of the big expenses that
auto premiums have to take care of.
A Wisconsin government committee studied the Saskatchewan plan and turned it down for that state on grounds that higher wages and higher accident rate in Wisconsin would require motorists there to pay double what Saskatchewan motorists pay.
The Saskatchewan plan is indirectly subsidized in several other ways. For example, private companies still do business in Saskatchewan and about twenty pereent, of the drivers buy additional insurance from the regular channels. The CCF government says this extra coverage is bought by the diehards as a protest against socialism. A more likely explanation is that the government’s compulsory insurance provides only limited protection—its limits are ten thousand, twenty thousand and
two thousand dollars. And in the case of property damage there is a hundreddollar deductible clause, releasing the government from all small claims, something no private company public liability policies have. Where there is a private company policy, the company must pay any claim up to its limit first, then if any of the claim remains the government insurance pays that remainder. The Wisconsin committee estimated that claims against the government plan were cut about twentyfive percent by this subsidization from non-government policies.
Saskatchewan insurance premiums don’t have to provide for the taxes that companies have to pay. And a North Dakota committee which studied the plan in 1950 came up with another clue to the mystery of Saskatchewan’s cheap insurance. It reported that Saskatchewan was selling insurance on private cars at a material loss which was made up by a profit realized on trucks and commercial vehicles.
In eight years of operation the Saskatchewan insurance office has accumulated more than $1,300,000 in profit, but it’s not auto insurance profit. By getting its foot in the door with compulsory automobile insurance the government has also become the largest writer of fire, accident, theft and numerous other lines of insurance. Actually, by the end of 1952, its auto insurance branch had gone more than eight hundred thousand dollars in the hole.
But there is little doubt that compulsory government insurance, by eliminating commissions, competitive selling and much of the overhead private companies have to carry, can provide insurance much more cheaply. It is doubtful, however, if another province could match Saskatchewan’s bargain rates, for Saskatchewan’s cheap insurance, because of its various hidden subsidies, is not as cheap as it looks.
Why are the companies fighting so strenuously to retain the present free-
enterprise control of automobile insurance if it is losing them money?
First, they’re afraid that government auto insurance would be the thin edge of the wedge toward the state’s entry into the whole industry, as it was in Saskatchewan. But, in addition, they hope it won’t remain a losing business. Auto insurance has a huge market. It’s easy to sell. Sooner or later they hope the accident rate and spiraling claims will level off so that they can start making a profit again. “It’s like a poker game,” one company spokesman said. “You don’t quit playing just because you’ve lost on a couple of hands.”
The companies fight staunchly against the two systems which have proved capable of providing cheaper automobile insurance—direct writing and any form of compulsory insurance.
They refuse to ditch the agent in favor of direct writing because they insist that motorists need the agent for satisfactory servicing of claims and renewals. “They’re afraid to cut us off.” one agent added. “They could get along without us in the automobile held because no effort is required to sell auto insurance, but some of their other more profitable lines are tougher to sell. They need the agents out there on the street plugging for them.”
State insurance is obviously anathema to the private insurance industry. It would leave them dead and buried. But they are opposed almost as strongly to any compulsory insurance plan that would still leave the underwriting up to the companies.
Massachusetts twenty-five years ago made auto insurance compulsory by law but left the companies to sell it. It looked as if the companies were being handed a juicy pile of easy business on a platter. But they fought it tooth and nail, and still do. Why?
Theoretically, a law making every driver buy insurance should spread the risk and reduce cost. But the industry argues that the majority of good risks buy insurance now and a compulsion law would only drag in all the poor risks and shove rates upward. Compulsion on drivers to buy means compulsion on companies to sell and this destroys the basis of successful underwriting, the freedom of companies to select risks. Under the present system, accident-prone drivers have a tough time obtaining insurance. They can usually get it under an “assigned-risk” plan under which the companies distribute poor risks among themselves, but they are charged a higher rate. And, starting this year, drivers with a three-year accident-free record are rewarded with a lower rate. This, the companies claim, provides an incentive to careful driving that compulsory systems do not have.
And defenders of voluntary auto insurance argue that under a compulsory system everybody knows that everyone else is insured so careless driving is encouraged and a “litigation neurosis” develops in which drivers start suing each other in reckless abandon whenever they get the least opportunity. Another charge is that when car insurance becomes compulsory there has to be government supervision over rates, and rate-setting becomes a political issue.
But the one inescapable factor, whatever the auto insurance system, is that the size and number of claims must always remain the principal determiner of premium rates. And claims, like everything else, are tied to the general price structure. So, no matter what changes are made, it looks as though we’ll never return to the good old days when the insurance premium was a minor item in the motorist’s budget. ★