May 10, 2021 — THE P&C premiums Canadians pay are at the high end of the international spectrum, a new report from the C.D. Howe Institute says.

Authored by Alister Campbell, CEO of the Property and Casualty Insurance Compensation Corp., and economist Farah Omran, it compares premiums paid in Canada to those of its international peers using data from the Organization for Economic Co-operation and Development.

The Toronto-based C.D. Howe Institute is a not-for-profit charitable research organization.

Its report, titled ‘The Price of Protection: Benchmarking Canada’s Property & Casualty Industry Against its Global Peers,’ says Canadians tend to pay higher premiums for risk transfer than citizens in many, if not most, other developed nations.

“This is happening despite the core products being offered by a highly competitive industry with normal claims payouts and generally lower returns on equity,” the authors say.

The report says Canada’s auto, property and liability gross written premiums from 2015 to 2018 amounted to 2.7% of its GDP on average, compared to an OECD average of 1.6% and a G7 average of 2%. It says these results indicate that Canadian ratios are generally in line with the U.S. but higher than other G7 peers.

The benchmarking data for auto coverage — which includes both commercial and private passenger insurance — shows Canadians paid, on average, the highest premiums in the world relative to GDP.

However, the authors cautioned that there are risks around small shifts in GDP data creating large swings in this type of benchmarking and said it is important to not  read too much into this finding.

“Rather, Canada’s ranking at the top should be interpreted as a general placement in the higher range among the sample of 31 OECD countries.” 

The report says the higher auto premiums in Canada appear to be directly correlated with ineffective government intervention.

For property insurance, it says costs in Canada are “intriguingly high” and that the explanations for this are harder to identify.

“However, they are likely 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 — such as earthquakes or flooding — leaving consumers to absorb a higher total share of risk from these types of event through higher risk- transfer premiums.”

The report notes that in many developed countries such as France, Germany and the U.S., more risk is transferred to governments via state-run pools or catastrophe backstop mechanisms for disasters including flooding and earthquakes.

“In Canada, the current absence — in the case of earthquake risk, an inexplicable absence — of such backstop mechanisms could explain why it appears that property owners end up paying more for their insurance than those in other nations.”

The report said a recent study from the Institute for Catastrophic Loss Reduction that found the take-up of earthquake cover to be much higher in the Lower Mainland of B.C. than in neighbouring Washington state suggests another possible explanation — innate Canadian conservatism and prudence.

“It is entirely possible that Canadians’ natural risk aversion is reflected in a higher insurance-buying propensity with an inclination toward lower self-insured amounts —  both of which would contribute to relatively higher average premiums.”

The report also noted that capital standards established by the Office of the Superintendent of Financial Institutions and applicable to all insurers operating in Canada require a partic-ularly high level of capital and reinsurance for insurers choosing to write property risks in disaster-prone areas relative to other developed jurisdictions.

It said that it is possible that Canada’s relatively high property insurance costs are  driven, at least in part, by the added price for prudence paid to cover the cost of the extra capital allotted to protect the system from insurer failure.

For the Canadian commercial sector — which the report notes is largely unregulated and highly competitive — it says premiums are in line with other major G7 nations.

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