Insurance
Corporation of British
Columbia:
Pricing Policy Analysis
ECON 205
Pascal Courty
November 25, 2011
Michelle Reynaud, Brad Goddard, Dominic Colantonio, Sean Thomas
ICBC: Pricing Policy |1
The Insurance Corporation of British Columbia (ICBC) was established as a crown
corporation in 1973 by the B.C. NDP government to create and implement mandatory universal
auto insurance for motorists (Tapley, 2005). According to the Insurance Corporation Act (1996),
“all property and money acquired or administered by the corporation is deemed to be the
property of the government for all purposes, including exemption from taxation.” While ICBC
currently holds a monopoly on basic British Columbian auto insurance, the provincial
government has permitted certain private firms to offer additional coverage on top of ICBC’s
basic Autoplan policy (Young, 2001). This report will look at the pricing policies of ICBC and
how these policies affect consumers as well as the corporation’s total revenue. Additionally, the
manner in which ICBC’s pricing policy segments the auto insurance market will be evaluated.
Finally, this report will conclude whether or not ICBC’s current pricing policy can be improved
upon and suggest any potential changes that could be made.
As the sole provider of British Columbian Auto Insurance, ICBC is a monopolist holding
insurance policies for over 2.5 million lightweight vehicles in BC. Interestingly, BC drivers pay
some of the highest premiums in Canada (rivalled only by Ontario, Manitoba and Saskatchewan)
(Hasan, 2011). Although there several insurance brokers in BC, all insurance must be purchased
and processed through ICBC. Essentially, every automobile in BC requires (at the very least)
basic Autoplan coverage from ICBC which results in an extremely high demand for the service.
As a vehicle and the corresponding insurance are perfect complements, prices of basic Autoplan
insurance could theoretically be set at any point ICBC determines to be feasible. However, ICBC
is a crown corporation and its prices are consequentially monitored by the British Columbia
Utilities Commission (BCUC). One function of the BCUC is working to keep British Columbian
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auto insurance prices at a reasonable level in order to promote economic growth, as
transportation-related demand accounts for approximately 12.2% of Canada's gross domestic
product (ICBC, 2011). Demand for basic auto coverage is not overly price sensitive because the
average consumer (assuming they don’t already own a vehicle) will usually decide whether or
not to drive on the basis of vehicle price, rather than insurance price. However, a shift in
insurance pricing could cause demand for insurance and vehicles to greatly increase or decrease.
For example, if the price of insurance premiums fell dramatically, the likelihood of consumers
insuring or selling old, unused or currently uninsured cars is significantly higher. Conversely, if
the price of premiums increased, substitutes would be sought out immediately and the supply of
used cars would increase substantially. Although there is no direct substitute for auto insurance,
consumers can also choose to walk, cycle, bus, or carpool and consequentially decrease the
number of insured cars in BC. As a result, ICBC has structured its pricing policy within BCUC
regulations such that insuring one’s vehicle is financially possible for a very large portion of
vehicle owners.
Basic Autoplan coverage is at the highest point of demand for ICBC, as all additional
coverage must be purchased after basic Autoplan coverage. To segment the market, ICBC offers
extensive policies for consumers who are more risk averse than others or require greater
coverage for an expensive automobile. For the average consumer who already has sufficient
coverage, the marginal benefit of any additional coverage is very low. Consequentially, the
demand for high-coverage policies is generally quite low. The majority of ICBC customers
receive the highest average marginal benefit from a moderately priced policy with moderate
coverage on their vehicle. Policies with low premiums, such as basic Autoplan coverage alone,
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allow consumers to legally drive their vehicles but cover the driver in few instances of accidents
or other potential mishaps associated with vehicle ownership. On the contrary, high-coverage
policies protect the holder in virtually any situation. However, the benefit from such a policy (for
a generally cautious driver) would be much smaller than the cost. For these reasons, ICBC
segments the market using direct and indirect price discrimination in order to capture the greatest
amount of consumer surplus and consequentially maximize total revenue.
ICBC’s pricing policies has been carefully structured to capture a large portion of the
consumer surplus of most British Columbian drivers. ICBC uses both direct and indirect pricing
policies to effectively differentiate between consumers. The market is directly segmented into
four basic categories: location of current residence, claims history, vehicle history and desire (or
lack of) for extra coverage. These segments are then indirectly segmented according to “rate
class”; rate classes are ICBC’s categories for different vehicle uses. The basic rate classes are the
four main uses of vehicles: business, commuting, delivery and pleasure. ICBC then breaks these
categories down once more into more than 150 additional categories (a grand total of more than
2400 different categories!). ICBC’s pricing policy is individualized for each consumer so much
that they have nearly achieved complete price discrimination. For example, a person that drives
to a large city for work every day is subject to greater volumes of traffic than someone driving in
a small community, and therefore their rates will be higher (unless that small community has a
high rate of vehicle theft, wildlife-related accidents, etc.) . The current value of a given vehicle
also has a great impact on amount of premiums paid. For example, insuring a luxury sports car is
much more expensive than the cost of insuring a reasonably-priced family-size sedan as the cost
to fix or replace a luxury car is much higher. The same can be said for accident history; the more
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accidents that someone has been in, the higher premiums they will pay, as they have been
deemed to be a greater hazard to other motorists. The size of large commercial vehicles will
result in higher premiums being paid, as if an accident occurs it will likely cause more damage
cost much more to replace it than the average light vehicle. Interestingly, many consumers can
(and do) lie about the intended purpose of their vehicle or current city of residence in order to
save money on premiums. They will not be covered in the event that they have, for example, a
policy only covering them in instances of pleasure use and are involved in an accident on their
way to work. However, proving where a person intended to drive at a given time (and whether or
not they’ve done it previously) is extremely difficult to do without constantly violating their
privacy. This is the main area where ICBC fails to completely minimize their surplus.
Information between policyholders and the firm is quite asymmetric (and completely asymmetric
for a first-time policyholder with no driving record); insurance suppliers cannot directly monitor
the actions of their policyholders (Png & Lehman, 2007). They can only differentiate between
them using basic information about their vehicle, driving history, location and desire for extra
coverage.
Also allowing differentiation between policyholders is the option to purchase
extended third-party liability or collision coverage in addition to basic Autoplan insurance
(which already includes the minimum legal amount of third-party liability coverage, but no
collision). Those who have third-party liability will be covered by their insurance up to a
specified dollar amount in the event that they cause an accident involving multiple vehicles or
otherwise and are found to be at fault. Those with collision coverage will pay a deductible in the
event that they are involved in an accident and any additional damage will be covered by ICBC.
Offering these services allows ICBC to differentiate between policyholders who are very risk
averse and those who are not. Those who are risk averse are willing to pay at least the same
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ICBC: Pricing Policy |5
amount for insurance as their expected loss without insurance (Png & Lehman, 2007), and the
size of premiums that they pay are calculated and adjusted by ICBC accordingly.
ICBC’s pricing policy is certainly an intricate one; it differentiates between policyholders
using the personal characteristics (location, vehicle condition/intended use, driving record and
need for various types of coverage) of each policyholder in such a manner that each buyer’s
marginal benefit is very close to their marginal cost, but not equal to it. ICBC’s only real means
of reducing its surplus further and achieve complete price discrimination is to invade the privacy
of its policyholders. However, this is not only illegal, but the costs of doing so would be much
greater than the benefits derived from it. In conclusion, we have determined that ICBC’s pricing
policy is an effective one as its effectiveness likely couldn’t be increased without seriously
violating the rights of its policyholders.
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Works Cited
British Columbia. Insurance Corporation of British Columbia. (2011). Autoplan Insurance.
Retrieved November 23, 2011 from http://icbc.com/autoplan
Hasan, M. E. (2011). Canadian Student Review. Regulation and the Canadian Auto Insurance
Market. Fraser Institute. Retrieved November 24, 2011 from
http://www.fraserinstitute.org/uploadedFiles/fraser-ca/Content/researchnews/research/articles/regulatory-severity-in-the-canadian-auto-insurance-market_csr-fall2011.pdf
Human Resources and Skills Development Canada. (2011, November 24). Environment –
Transportation/Indicators of Well-Being in Canada. Retrieved November 23, 2011, from
http://www4.hrsdc.gc.ca/.3ndic.1t.4r@-eng.jsp?iid=67
Png, I. & Lehman, D. (2007). Managerial Economics. (3rd ed.) Blackwell Publishing.
Tapley, P. E. (2005). A Strategic Analysis of a Property and Casualty Insurance Broker in
British Columbia. Simon Fraser University. Retrieved November 24, 2011 from
summit.sfu.ca/system/files/iritems1/10126/etd1889.pdf
Young. J. (2001). Down the Road: the Implications of “Full Competition” for Public Auto
Insurance in British Columbia. Canadian Centre for Policy Alternatives – BC Office. Retrieved
November 24, 2011, from
http://www.policyalternatives.org/sites/default/files/uploads/publications/BC_Office_Pubs/down
_road.pdf
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