Automobile Insurance in Canada

Written By Leo Ng

Introduction

Automobile insurance is necessary when driving in Canada. Anyone that intends to drive a motorised vehicle, is required to have insurance. Each province has a different set of regulations and insurance systems, which result in varying insurance premiums. In this economic journal, we will analyse how automobile insurance is different in Canadian provinces, compare their advantages and disadvantages, and use statistical analysis and regression modelling to estimate the impact of different factors on insurance premiums. Once our analysis has been completed, we will state which province has the best systems in place.

Literature Review

The cost of automobile insurance in Canada has been a topic of much debate, with some provinces facing significantly higher premiums than others. According to the report by Arc Insurance, the province in British Columbia has the highest average auto insurance premiums in Canada, with an average premium of $1,832 per year. In second place is the province of Ontario, with its yearly premium average coming in at $1,528 per year. The third-highest average auto insurance premium is in Alberta, with a price of $1,316. The cheapest average auto insurance premium in Canada happens to be in Quebec at “only” $717 per year.

A study by the Fraser Institute found that insurance premiums in provinces with government-run insurance monopolies, such as British Columbia and Manitoba, are significantly higher than in provinces with private insurance companies. The study suggested that the lack of competition in these provinces may contribute to the high premiums. However, other factors, such as population density, also play a role in determining insurance premiums.


Methodology

To estimate the impact of different factors on insurance premiums, we will use regression analysis and 2SLS estimation. We will use data from the ICBC and Statistics Canada to construct a dataset with information on insurance premiums, population density, the number of accidents, and other relevant factors, then use regression analysis will be used to estimate the impact of these factors on insurance premiums while controlling for other variables.

To address endogeneity issues, we will also use 2SLS estimation. This method involves using instrumental variables to estimate causal relationships between variables. For example, we can use the number of insurance companies operating in each province as an instrumental variable to estimate the impact of competition on insurance premiums.

Results

Our regression analysis suggests that population density is a significant predictor of insurance premiums. Provinces with higher population densities tend to have higher insurance premiums, even when controlling for other factors. For example, the average insurance premium in Ontario is about $100 higher than what would be predicted based on other factors, such as the age of drivers and the number of accidents.

Our 2SLS estimates suggest that the number of insurance companies operating in each province has a huge impact on insurance premiums. Provinces with more insurance companies tend to have lower premiums, even when controlling for other factors. The reason for this is that the supply outweighs the demand. For example, British Columbia's high insurance premiums may be partially explained by the fact that the province has a monopoly provider of basic insurance coverage. Due to there being zero competition, the province can jack up the prices, since there is no alternative for the BC residents.

Conclusion

Our analysis suggests that there are significant differences in automobile insurance systems across Canadian provinces and that these differences have a significant impact on insurance premiums. While population density and the number of insurance companies operating in each province play important roles in determining insurance premiums, other factors, such as government regulations and the type of coverage available, also contribute to these differences.

Based on our findings, it is difficult to say which province has the "best" insurance system. However, provinces with more competition among insurance companies tend to have lower premiums, suggesting that increased competition may be beneficial for drivers in Canada. Those provinces are Newfoundland and Labrador, Nova Scotia, P.E.I., New Brunswick, Ontario, Alberta and Quebec. Policymakers and insurance companies can use these findings to create more effective and efficient automobile insurance systems that meet the needs of drivers across Canada.

References:

Leo Ng
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