ICBC approaches ‘D-Day’ for capital reserves to pay soaring claims

British Columbia's public auto insurer's ability to meet its obligation to pay claims is on a crumbling footing, a key measure of the financial health of an insurance company shows.

The Insurance Corp. of B.C., according to its latest financial update, has only half of the capital it is required to hold in reserve to ensure that it is able to pay its claims.

Premiums have not increased fast enough to cover ICBC claims, and late last month the taxpayer-backed company announced its deficit is now expected to reach $1.3-billion this year.

"They are on the fast track to insolvency by everything we have seen and it's extremely concerning for us," said Aaron Sutherland, the Pacific regional vice-president of the Insurance Bureau of Canada. "Ratepayers should be concerned. … We are approaching D-Day, when they don't have any capital left. Then, how will they be able to pay their claims?"

In 2013, ICBC's books were in good shape. It exceeded its minimum capital requirements, which were funded that year at a rate of 204 per cent, meaning that it had roughly $2 in capital for every dollar expected in claims that year.

However, on the eve of the provincial election, the BC Liberal government enacted a "rate-smoothing" policy in March, 2013, that capped increases in ICBC's insurance premiums – just as cost pressures were starting to explode. The BC Liberal government clawed back any income in excess of the minimum capital reserves, so to provide more of a cushion against rising claims costs.

ICBC warned in 2013 that the rate-smoothing policy would create more risk, and asked its regulator that year to raise the minimum required reserves from 175 per cent to 190 per cent. While rate increases have been kept to about 5.5 per cent each year since, claims costs have risen at a much faster pace. Now, the minimum capital reserve stands at 50 per cent.

The Insurance Bureau represents private insurance agents and has long argued that B.C.'s publicly owned monopoly on basic auto insurance should be dismantled.

Mr. Sutherland noted that his members are required by federal law to keep minimum reserves of capital equal to twice their anticipated claims costs. By that measure, he said, ICBC would have already been shut down by federal regulators. But ICBC, backed by taxpayers, has a lower requirement for capital reserves, of just 100 per cent.

In a written statement, ICBC spokesman Adam Grossman said the insurer still has claims reserves of $11.7-billion, but that ICBC is losing money at an unsustainable pace.

"While our reserves remain significant, the amount of premiums we are collecting from customers is not covering the ever-increasing amounts we are paying out in claims costs and this is not sustainable," he said.

The Crown corporation is grappling with a rapid increase in the number of collisions, as well as the rising costs of those claims. Attorney-General David Eby has promised to introduce major changes this spring to tackle "very serious and unsustainable trends."

Mr. Eby, whose NDP government took power last summer, said another bailout by taxpayers would only provide a temporary fix and ICBC needs a more dramatic restructuring."

"We could put $1-billion into ICBC this year, but we would also have to put $1-billion in next year and the year following," he told reporters in a briefing earlier this week. "More and more money that should be earmarked for schools and hospitals will instead go into propping up a broken automotive-insurance system."

ICBC has struggled for years to keep its head above key financial markers. It has had to move money around to maintain its basic insurance minimum capital test of 100 per cent, which is required under a special direction of the province's Insurance Corporation Act.

In an ICBC service plan a year ago, the insurer warned its basic minimum capital test for 2015 was expected to fall below 100 per cent. Facing this shortfall, a capital transfer of $450-million was made from its optional business to its basic business. This was approved through a cabinet order by the BC Liberals and the money was transferred in January, 2016.

A similar move was made in 2012. The Liberals approved an ICBC request to move $373-million of "excess capital" from its optional capital account to its basic account, according to a report from industry magazine Canadian Underwriter. Without the money, ICBC would have been only "marginally" above its required minimum capital test for basic insurance. ICBC said in mid-2013 that it had seen "significant volatility" since 2010 in its basic insurance capital situation.

A report produced for ICBC last summer by the consultancy firm Ernst & Young concluded that major changes are necessary.

Among the many figures in the 203-page report, the document showed ICBC's basic capital position was in the process of collapsing and could be in the negative by 2021.

Given the situation, large cash transfers could likely be required to maintain ICBC's basic minimum capital test, as has already been the case.

The numbers in the future could average roughly $500-million annually over the next several years, according to data distributed by the private insurers lobby group, from a Freedom of Information request filed by Richard McCandless, a researcher and retired provincial civil servant.