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Answer critical analysis questions. ISSUES AND APPLICATIONS Private or Public Auto Insurance: What is Best for...

Answer critical analysis questions.
ISSUES AND APPLICATIONS Private or Public Auto Insurance: What is Best for Canada? Concepts Applied: Capitalist, Command, and
52 ANTE INTRODUCTION FIGURE 2-7 2 O ttons Comparison of Average Auto Insurance Rates Province: October 2005 7 com 32500 5.200
52 PART INTRODUCTION FIGURE 2-7 Comparison of Averas Auto Insurance Rates Province: October 2005 t ance Rates by Province 74
CHIL DULTON POSSIA ICONOMIC SYSTEMS 53 experienced by one of the individuals would be significantly for critical analysis gre
ISSUES AND APPLICATIONS Private or Public Auto Insurance: What is Best for Canada? Concepts Applied: Capitalist, Command, and Mixed Systems; Productive Efficiency, Allocative Efficiency; and Equity t the cost of he codents a How does t In response to public outrage over styrocketing car insurance premiums, the consumers' Association of a completed a comprehensive report on auto insurance rates in Canada September 2003 in presenting the report the association noted that government-owned or public auto insurance sys- tems offer the lowest premiums for Canadian drivers dyrocketing car an Canada completed a surance rates in Canada 5300 com in the pro d on ability 5500 c on deductible 100 bensive deductible. As you can see from he c arurance premium significant sofish Columbia Saskatchewan, Maria and Quebec where the mandatory insurance is provided Jovent monopoly The Consumers Association of Canada's report also the differences in the annual rate of increase in prem between the private and public insurance systems in 2003 W e were escalating by up to 70 percent per the provinces where privately owned insurance como Beate Mantobas publicly run auto insurance System ncreasing annual premiums by only 7.2 percent. Provincial Automobile Insurance Rates Figure 2-6, taken from the report, compares the average annual auto insurance premiums among provinces, assuming the same insurance coverage, vehicle, driving record, and claims history. The average premiums are based on over 7000 rate quotes across Canada. All quotes assume an insurance FIGURE 2-6 Comparison of Average Auto Insurance Rates by Province, 2003 Source Review of Automob r ance Rates Consumers' Association of Canada September 2003 11 www consumer carp 30910 ortodf. Copyright Consumers' Association of Canada (accessed November 11, 20031. BC AB SKMB ON PO NB NS PE NL To add fuel to the fire in provinces offering private insur- ance, individuals can pay significantly higher premiums based on such criteria as age, gender, and marital status, regardless of the driving record or type of vehicle being insured in New Brunswick, in 2003, older drivers who drove newer, much more expensive cars, and who had driving convictions, paid up to $2000 less for auto insurance compared to young drivers with clean driving records. A 2002 Ford Taurus SE was more than $7000 cheat an 18-year-old male with a dean driving record to insure in toon's public insurance system than in Torontoor St John's we private insurance companies operate in provinces with us auto insurance, where rates were not based on age or gende young driver with a clean record paid a lower premium older driver with driving convictions
52 ANTE INTRODUCTION FIGURE 2-7 2 O ttons Comparison of Average Auto Insurance Rates Province: October 2005 7 com 32500 5.2000 cano National study of Auto These Commons Association of Corpse 19. 2005 www.consumer adly 51500 $1000 $500 NL NS C MB AB NB SK ON added pressure of rang premiums in order to reco The Advantages of Using incurred in a global diasters such as the Septe the Command Model terrorist attacks in the United States It is interesting to note that Manitoba, the province that The Advantages of Using lowest average annual auto insurance premi. the Capitalist Model ums, according to the Consumers' Association of Canada's study operates an insurance system that most closely resem in a series of recent studies, the Fraser Institute, a Cana bles the pure command model. That is Manitoba Public organization that promotes market-based policies, defen Insurance (MPI), a government-owned monopoly provides use of the capitalist model in providing mandatory auto the mandatory car insurance and the claims are paid out on ano-fault basis ance. The Institute argues that a public auto insurance results in more accidents and imposes greater burdens So, how can a pure command system result in lower suto insurance premiums when compared with the pure health-care system when compared with private insur capitalist model? First, there are factors inherent in the pub After examining two private insurance provinces and the lic system that make it more productively efficient to public insurance provinces, the institute notes that the bateature the system does not have to employ the Of C a ndre related deaths expensive legal and court-related resources to establish fat and hospital admissions significantly higher, per 100 and to establish the extent of the legal damages experienced poculation of per vehicle kilometres travelled by each injured party in each accident As well the amount provinces with publnsurance This difference is most Of benefits paid out per claim to compensate an n ounced for males between the ages of 16 and 25 years party for pain and suffering is significantly lower in the pub institute suggests that since the public insurance system system charge higher premiums for certain high-risk classes, such a Since the government is the sole organization providing the younger male class it encourages too many risky mindatory car insurance in the province, it does not have to take to the road, and t shifts coon costs to other en ploy resources to market its services to the customer Vare primarily female. Sater, and older drivers. As well the ove as the sole provider the public insurance organerations suits that accompany the fault system can provide able to avoid the duplication in administrative resources that tives for safer driving typical occurs when numerous private car insurance como Another benefit of the pure capitalist approach tout les compete with each other in the same province Beause the puble system can offer the same insurance coverage with insurance relates to the goal of active efficiency minimal use of resources it is able to keep it costs down and based insurance system provides the opportunity for red individual to take the necesar legal action to in turn, charge low premium A public insurance organization, such as Manitoba Public that the dollar value of the compensation resulting from does not have to raise premiums to a point where profits have accident daim marginal benefit is sufficient to cover the to be earned on its operations, as is the case with privately run marginal cost related to the individual's injuries and loss companies Unlike the provincially owned public insurance Sustained from the accident providers multinational private insurance corporations face the As an example, two individuals may suffer the same physical injury in an accident, but the pain and suffering
52 PART INTRODUCTION FIGURE 2-7 Comparison of Averas Auto Insurance Rates Province: October 2005 t ance Rates by Province 74 Comune 312 Ons 52000 2003 0.7 51500 51000 $500 Ich as the September ON AB NB NL NS BOMBS added pressure of racing premiums in order to red The Advantages of Using ncurred in past global disasters such as the Sea the Command Model terrorist attacks in the United States It is interesting to note that Manitoba the province that The Advantages of Using charges the lowest average annual autosurance premi the Capitalist Model ums, according to the Consumers' Association of Canada's study, operates an insurance system that most closely resem na sees of recent studies, the Fraser Institute bles the pure command model. That is Manitoba Public organation that promotes market-based polices de Insurance (MP) a government-owned monopoly provides e of the capitalist model in providing mandatory a the mandatory car insurance, and the claims are paid out on nge The Institute argues that a public auto insurance ano-fault basis results in more accidents and imposes greater burdenso So, how can a pure command system result in lower healthcare system when compared with private nu sutonsurance premiums when compared with the pure After examining two private insurance provinces and capitalist model First, there are factors inherent in the pub lic system that make it more productively effort to its public insurance provinces, the Institute notes that the no-fault feature the system does not have to employ the of collisions and the number of cosion related deaths expensive legal and court-related resources to establish fault and hospital admissions is significantly higher per 100 and to establish the extent of the legal damages experienced population of per vehicle kilometres travelled the by each injured party in each accident As well the amount provinces with public insurance The difference is most Of benefits paid out per claim to compensate an injured nounced for males between the ages of 16 and 25 years party for pain and suffering is significantly lower in the pub Institute suggests that since the subcnsurance system system charge higher premiums for certain high-risk classes, such Since the government is the sole organation providing the younger male class it encourages too many ry mindatory car insurance in the province it does not have to take to the road, and it shifts casion costs to others en ploy resources to market its services to the customer More primarily female, safer and older drivers As we the ove as the sole provides the public insurance Organization is awsuits that accompany the fault system can provide able to avoid the duplication in administrative resources that tives for safer driving typical occurs when numerous private carnsurance como Another benefit of the pure capitalist acoroach les compete with each other in the same province Because Tutance relates to the goal of locate the public system can offer the same insurance coverage with n based insurance system provides the opportunity to minimal use of resource it is able to keep costs down and red individual to take the necesare in turn, diarge low premium con that the dollar value of the compensation resulting from A public insurance organization, such as Manitoba Public does not have to raise premiums to a point where profits have accident ca marginal benefit) is sufficient to cover seu to be eamed on its operations, as is the case with privately run marginal cost related to the individual's injuries and companie Unlike the provincally owned public insurance Sustained from the accident providers multinational private insurance corporations face the As an example, two individuals may suffer the physical injury in an accident, but the pain and suffering
CHIL DULTON POSSIA ICONOMIC SYSTEMS 53 experienced by one of the individuals would be significantly for critical analysis greter if that ndividual could no longer engage in his or her favourite hobby playing the piano. The fault-based the recommand model of providing insurance system could enable the piano lover to receive a auto insurance can promote productive efficiency higher level of compensation based on the higher level of 2. 2 Explain how the pure capitalist model of providing auto pain and suffering (ie, the higher level of marginal cost). In insurance can promote the goals of public safety and contrast, the pure command model's no-fault system would allocative efficiency likely pay out the same level of benefits to both injured indi- in what equity fairness) trade-offs are involved viduals when choosing the pure command model of providing auto insurance Using a Mixed System 4. A provincial government freezes the premiums charged by private insurance companies but lets the fault system Despite the potential benefits of using a pure capitalist determine the payment of claims What problems will approach in the provision of auto insurance, Canadians residing likely occur with this mixed-system policy? in the private insurance jurisdictions are putting political pres- sure on their provincial governments to play an active role in Sources Review of Automobile insurance Rates Consumers' Association the auto insurance industry. Many of the private insurance of Canada. September 2003. pg 5. http://www.consumer cats 030910 report pdf (Accessed August 25, 2010). Auto Insurance provinces are moving toward a mixed economic system of po a te camion Studeuly 28, 2003 Consumers Aston of viding auto insurance. While privately owned corporations on Canada Suly 2003 PO 3F w ww.cacbc.com reports July tinue to provide the car insurance in these provinces, the 2028 2003%20Reports.20AUTO20NB pdf Accessed November 11 2003: SI2003 Rate Comparison Profiles www.Sus cal provincial governments are proposing to fix the premium rates So internetrates/2003 rate profiles.htm . Accessed November 11, and set maximum dollar limits for the payout of certain types of Public auto insurance morty warning for claims, such as pain and suffering These governments have a motorists Fraser institute. September 2003. DO 14 www difficult task ahead of them as they attempt to strike an accent f asernstitute og research-news/osplay aspxid=13327 Accessed able balance between affordable premiums, public safety equity, and their own political party's commitment to promote a capitalist provincial economy F28%29999 fie
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Answer #1

1. As in the case of Manitoba Public Insurance, pure command model of providing auto insurance can provide productive efficiency since the model is based on no- fault feature. This saves the company the cost of settling expensive legal disputes ( to establish which party is at fault). Further, the compensation paid out for injuries or suffering is lower in public sector entreprises as compared to the private sector. Public system also minimizes use of resources as it avoids duplication of administrative resources ans saves the costs for marketing its product (since it is the monopoly supplier).

2. Pure capitalist model of providing auto insurance incorporates fault based mechanism in settling disputes as opposed to no fault system practiced in pure command model. Under fault based system, the compensation or benefits paid out are subject to marginal cost differentials. This is allocative efficiency as even if two individuals suffer same injuries the opportunity cost of the injuries may be different to both when the consequences of injuries in their lives are taking into consideration. It ensures that the dollar value of compensation (marginal benefit) sufficiently covers the full marginal cost.

It also ensures public safety due to differential premium requirements. It charges higher premium from high risk driving classes and thus discourages too many risky drivers on the road. Further high litigation costs and expensive settlement of lawsuits in case of accidents nudges the people to drive safely.

3. The equity tradeoffs under command model of insurance arise due to charging lower premiums from relatively risky drivers. Empirically, males between age of 16 and 25 are described as risky class of drivers.In fact, their collision costs are shifted to other drivers including the categories of females, safer and older drivers. Another tradeoff is also faced between raising premiums and spending on healthcare since public system results in more accidents and imposes greater burden on the healthcare system.

4. If the provincial government sets an upper limit on the premiums charged by private insurance companies but not on the fault based claim settlements, this arrangement is likely to run into trouble since the risky class of drivers would have have to pay lower premiums than what their obligations would have been in a pure capitalist model. Lower premiums will not deter them from risky driving as a consequence, accident poll might rise. This will result in several rounds of losses for the private insurance company as it would have to settle expensive lawsuits and even pay claims to the injured.

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