Two private-sector auto insurers have served notice over the past month they’re leaving the province.

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'Something's wrong with this market' — private firms look to leave province as 'auto insurance crisis' roils Alberta Back to video

Credit rating agency Morningstar DBRS says Alberta needs to find a long-term solution “to its auto insurance crisis or risk further capacity constraints.”

Premier Danielle Smith agrees changes are needed to fix a provincial auto insurance system that has left Albertans paying too much, and companies looking to leave Wild Rose Country.

“Look, we’ve had a lot of competition and yet we haven’t had the lowest rates. So something’s wrong with this market,” Smith said in an interview this week.

“I’m concerned about the consumer.”

In another sign of turmoil sweeping through the province’s auto insurance market — a market that has left Alberta motorists facing the second-highest rates in the country — Sonnet Insurance Co. said last month it will discontinue offering auto insurance in the province in mid-December.

Last week, the direct-to-consumer business of Aviva Canada announced it intends to phase out its home and auto business in the province in January 2025.

Aviva said its claims costs have topped insurance premiums for years, pointing to litigation-related expenses as the largest factor driving up auto insurance premiums in Alberta.

As bills for motorists have risen in recent years, Alberta’s auto insurance system has been under an intense spotlight.

The UCP government has already capped vehicle premium increases this year at 3.7 per cent — for what it deems good drivers — after rates for private passenger vehicles were frozen last year.

Yet, some motorists still saw their bills escalate by more than the rate of inflation last year due to previously approved hikes and other factors.

The average auto insurance premiums climbed by about five per cent last year to $1,669, according to the Alberta Automobile Insurance Rate Board.

However, temporary rate freezes can’t continue if private insurers keep fleeing and competition diminishes.

“Rate suppression, rate freezes — you’re just keeping a lid on a boiling pot that’ll eventually have to explode,” said Martin Halek, an associate professor of risk management and insurance at the University of Calgary’s Haskayne School of Business.

“The choices are not easy because something’s got to give.”

The province is considering sweeping changes and conducted consultation earlier this summer on potential reforms, while releasing two reports studying the sector.

The premier expects the decisions to be rolled out in the fall.

“There are some small players that, because we put in a requirement that they cannot increase rates by more than inflation for good drivers, they made the determination that they couldn’t stick,” Smith told reporters Monday when asked about the two firms departing.

“Our No. 1 goal was to make sure people have affordable insurance. That is going to require the companies to assess the new realities in our marketplace.”

And what is the new reality?

According to the report by Morningstar DBRS released this week, Alberta insurers have endured years of weak profitability.

Between 2017 and 2019 under the NDP government, increases in annual auto insurance premiums couldn’t exceed five per cent.

The cap was removed by the Kenney government in 2020 but, after rates and profits increased, a freeze was implemented by the province last year.

“A handful of insurers have left over the past five years. We believe that others may follow,” states the report co-written by Nadja Dreff, a senior vice-president at Morningstar DBRS.

Insurers’ profitability has suffered due to government intervention, the report said. Even with the rate cap lifted in 2020 — and a return to profitability the following two years — there was a net underwriting loss for the five years ending in 2022.

In an interview, Dreff noted the two insurers leaving the province are direct-to-consumer entities with a relatively small share of the Alberta market.

But exiting the province is a tough decision, she added.

“They are, in fact, saying, ‘Well, this is just not worth it for us,’ ” Dreff said Tuesday.

“The idea that others are perhaps contemplating doing the same, that’s what should be also on the minds of policymakers. They certainly don’t want to see a kind of mass exodus.”

Pressures tied to inflation, the rising bills to repair vehicles, damages caused by natural disasters — such as hailstorms — and personal injury and litigation-related expenses from accidents are cited by experts as key reasons for cost increases facing insurers.

Aaron Sutherland, a vice-president with the Insurance Bureau of Canada, said the cost of vehicle theft is up 55 per cent in the past two years, while legal expenses and litigation challenges are expected to grow by nine per cent this year.

“Before the rate pause, we had 17 auto insurers losing money on the sale of coverage — and that hasn’t improved,” he said.

Much of the discussion around future reforms will likely focus on how to contain costs and bring down rates.

A tricky question for Alberta could eventually determine whether the province introduces a no-fault system over how injured claimants obtain benefits and care without litigation — as other provinces have done — or retain a system that allows an injured party to sue over medical costs, damages or lost wages.

“Do you go to a no-fault system like they have in Saskatchewan, where instead of having the ability to access the courts, you have a schedule of payments that get paid for personal injury?” the premier said.

“Or do we retain the full system of being able to access the courts, and the price of that is higher insurance rates . . . or is there a hybrid?”

Smith said the government doesn’t have the answers yet.

Her preference would see the tort system as the standard, but consumers could opt for a no-fault payment schedule if they want lower auto insurance rates.

“I don’t think it’ll make anyone 100 per cent happy,” the premier added.

“We’re trying to thread the needle to do what’s best for consumers.”

Chris Varcoe is a Calgary Herald columnist.

cvarcoe@postmedia.com