The Alberta Superintendent of Insurance office has been in the news this week for issuing a series of fines to insurance companies for overcharging Alberta motorists. After reading this article I thought it would make sense to provide a little perspective on why and how this could happen.
CBC released an article this week announcing that $1.5M in fines have been handed out by Alberta's Superintendent of Insurance over the past 4 years. Alberta's Superintendent publishes all enforcement action on the Government of Alberta website. Click here to view that PDF that was likely the source for that article.
How Are Alberta Insurance Rates Regulated
Alberta's Superintendent of Insurance and Alberta Auto Insurance Rate Board (AIRB) play an important role in our province. They exist to ensure that Albertan's continue to pay fair prices for mandatory forms of insurance like auto insurance liability.
The AIRB is the organization responsible for regulating automobile insurance rating programs in Alberta. Together, the rate board and Superintendent are the Government groups who enforce and develop the guidelines that the insurance companies operating in Alberta must abide by.
Operating within these guidelines, auto insurance providers must submit a proposal to the AIRB if they would like to increase rates. This is normally done to ensure there is enough premium coming in to cover the claims being paid out. (Which is a constant battle in Alberta, but that's another story.) The rate board reviews and approves or denies this increase. The company must then stay within this threshold, which is averaged out across all of the customers.
So Why Do Overcharges Happen?
There are a few things to know about these rate restrictions that will help us explain this.
- They are averaged across each companies entire book of business.
- They apply only to the liability portion of an auto policy.
- Each insurance company evaluates rating using a complicated set of criteria based on historical data they have gathered.
- Every person received a different rate based on this criteria and how it applies to them.
- It is calculated as a percent increase or decrease over the previous year.
With this in mind, when we say Alberta motorists have been overcharged, it means that overall the company took in too much premium based on the amount they were allowed. This is most likely due to errors in their actuarial formulas that result in some drivers receiving too high of a premium and some too low. What it comes down to is that these overages likely happened unintentionally due to the complexity of the systems involved. Insurance companies know that they are audited regularly in Alberta and would prefer to avoid the issues that come with violating these regulations.
So How Much Were Albertan's Overcharged
The only publicly available information on this story is the amount each company was fined. So we don't know how much they were in excess, but from experience in the industry I would estimate that these overages were in the 10's of dollars for individual clients.
It does not make it alright that on the individual level, the consumer impact of this is likely quite low. This is why there are fines. In each of these cases the companies have paid their fines and, from what I can see, refunded their customers of any overages. I am not condoning operating outside the limits of what the regulators allow, but sometimes it helps to know a bit more about and how these errors could have occurred.
