What’s killing ICBC—and should it be saved

It’s no secret that ICBC is under financial distress. In 2016/17 it suffered its largest loss ever—$889 million, an amount equal to 18 per cent of its total premiums. What’s worse, it’s heading for an even larger $1.3 billion loss this year, which would represent 23 per cent of its premium revenue. Why has this happened?

ICBC, the Insurance Corporation of British Columbia, is a hybrid of an auto insurer and instrument of government policy. It operates driver licensing and testing and undertakes road safety programs. It also offers discounts to seniors and the disabled, together with insurance premiums that cannot reflect either the age or gender of the drivers it insures. Even with these added duties, ICBC managed to cover its costs for many years by raising rates by virtue of its monopoly on mandatory coverage.

So what’s changed, causing the large losses?

ICBC’s basic business—providing mandatory auto insurance coverage—has fell victim to both an unfriendly environment and misguided provincial government policies. The adverse environment arises from a greater frequency and severity of claims. The higher costs from more vehicles and greater congestion are largely beyond ICBC’s control. But reduced enforcement by police on the roads may have increased the number of accidents, and the way ICBC assesses property damage claims may have also raised costs.

But cost escalation is only part of the story. The provincial government’s rate smoothing measures that limited ICBC’s ability to raise the rates for its basic business have left revenues short of covering costs, resulting in losses in four of the last six years. Without this requirement, ICBC could have preserved its finances by raising rates to reflect increasing costs. While the rate increases would have been significant (and certainly not welcomed by customers), they would have saved ICBC from implementing larger rate increases in the future.

However, multiple years of losses at ICBC’s insurance monopoly have been offset by $1.4 billion transfers from ICBC’s optional—or non-mandatory—car insurance business. Indeed, without these extra funds, ICBC’s insurance business coffer would have fallen below the regulatory minimum, leaving the insurance business essentially insolvent. Unfortunately, the transfers have become more than a Band-Aid and simply masked the underlying problems and delayed corrective measures.

ICBC’s condition has now become so desperate that B.C.’s attorney general has suspended the minimum capital requirements for ICBC’s basic business, leaving a smaller buffer (or cushion) to meet its claims.

ICBC differs from private insurers in one important respect. Private insurers can and do fail, without a substantial impact on the auto insurance market, because other insurers can move in and take over their business. Failure of ICBC would be much more damaging because of its size (annual premiums total more than $5.0 billion) and because it’s the only supplier of mandatory insurance in the province. Clearly, ICBC’s financial position is unsustainable.

The Horgan government deserves credit for bringing the issue forward and seeking informed advice. But Band-Aid solutions will not be enough. ICBC’s role must be rethought, as must the objectives and role of government in the auto insurance business in B.C. Should the government be in the auto insurance business? If so, should ICBC be treated as a purely commercial concern? Or should it instead continue to serve as an instrument of government policy? If the latter, then how can these activities be sustained while maintaining the financial soundness of ICBC?