ICBC may cut basic auto insurance rates

Corporation told to move $530 million from optional policies
Michael Kane
Vancouver Sun

The provincial government is ordering the Insurance Corp. of B.C. to reallocate more than half of its financial reserves, a move that could lower rates on basic auto insurance.

But watchdog groups say the directive also puts the government back in charge of regulating the publicly owned insurer, while reducing the role of the B.C. Utilities Commission to that of a rubber stamp.

The government ordered ICBC on Friday to shift $530 million worth of nearly $1 billion in reserves backing up its optional policies to the basic insurance side of its business.

A news release dated Oct. 7 said the directive was in a response to a finding by the BCUC earlier this year that the insurer was effectively subsidizing its optional rates where it faces competition by using money raised from basic insurance premiums where it has a monopoly.

Even after the transfer, the government says the optional insurance business will remain capitalized to the same level required of ICBC's competitors.

Jim Quail, a staff lawyer with the B.C. Public Interest Advocacy Centre, said the transfer increases the likelihood that the utilities commission will order cuts in basic rates after public hearings in December.

"A whole lot of money that accumulated over the years that was mainly stuffed under the optional mattress has now been moved to the basic mattress where there isn't the need to build the capital base," Quail said.

ICBC says any decision on basic rates rests with the BCUC but cautions that the regulator will also have to consider a six-per-cent increase in claims costs so far this year.

"We are seeing higher injury costs than we were expecting and it is getting worse," spokesman Doug McClelland said.

The government had previously ordered ICBC to allocate 95 per cent of retained earnings to the optional line of business to level the playing field for private sector competitors which are required to build substantial reserves.

The about-turn was greeted with shock Wednesday by Bruce Cran, Vancouver-based president of the Consumers Association of Canada, who says government-owned insurers do not need to build substantial reserves at the expense of motorists.

"The pretence that BCUC is in charge is an absolute crock, I just find it incredible," Cran said. "The government, whilst claiming that they are handing over responsibility to BCUC, is not allowing the commission to do anything.

"The biggest problem in British Columbia is that successive governments have stuck their finger in the pie at every opportunity and this government is no different. In fact, they are worse."

Quail said the government has emasculated the role of the utilities commission and ICBC is once again being run directly by the cabinet.

"They have put themselves back in charge of regulating ICBC and they have put the commission in the position of basically rubber stamping whatever happens between the government and ICBC."

However, McClelland suggested the transfer is more a case of the BCUC telling the government what to do as foreshadowed by the commission's January ruling that the allocation of reserves to the optional business amounted to a subsidy detrimental to the basic business.

"The government's job is to set the rules and BCUC's job is to make sure the rules are being followed," McClelland said.

The transfer is not expected to impact ICBC's recent announcement of $100 million in rate reductions in optional premiums which will not be fully realized until 2007.
The optional reserves continue to be adequate," McClelland said. "We will continue to look at claims costs trends and if there is room to lower optional rates in the future, we will do so."

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An order forcing ICBC to shift $530 million of its reserves from its optional policies to the basic side is in response to a finding by regulators that ICBC subsidizes its optional insurance offerings -- where it has competition -- with money raised from its monopoly on mandatory basic premiums. The following shows how big a role optional premiums play in ICBC's bottom line:

Basic insurance: Minimal profits

$1.7 billion: ICBC revenues from basic insurance, first half 2005.

$50 million: ICBC profit from basic insurance, first half 2005.

Optional insurance: Substantial profits

$1.37 billion: ICBC revenues from optional insurance, first half 2005.

$349 million: ICBC profits from optional insurance, first half 2005.

Source: ICBC Aug. 22 filing with B.C. Utilities Commission

The playing field:

100%: ICBC's share of mandatory basic insurance market.

89%: ICBC's share of the optional (collision and comprehensive) insurance market.

11%: Remaining optional insurance market in B.C., shared by four companies.

Source: Canadian Direct Insurance

Ran with fact box "The Basics on Basic Versus Optional Insurance", which has been appended to the end of the story.