What getting rid of ‘postal code discrimination’ would mean for your car insurance

Have you ever moved to a new neighbourhood, updated your address with your auto insurance company, and suddenly ended up having to shell out more money for the same coverage? Well that might soon be a thing of the past for Ontario drivers.

Two of the three major parties have promised to discontinue the practice of using postal codes to set their auto insurance rates, a practice that has been called “geographic discrimination” as well as “territorial rating”.

With election day upon us and the Liberals currently trailing in a distant third according to polls, it seems that we’re in for either a PC or NDP government for the next four years. Both parties have mentioned getting rid of postal codes as part of their platforms, though the conservatives have yet to mention it in their official platform. The NDP, on the other hand, have been fairly transparent about their platform, promising to give Ontario drivers the 15% average rate reduction the Liberals promised back in 2015 and also address territorial rating in order to protect low-income and racialized communities that are disproportionately affected by the practice.

Drivers in Ontario pay more for car insurance than any other province in Canada, and despite repeated promises from the Liberal government to lower the cost of insurance over the last few years, premiums continue to rise. With parties across the board promising change, drivers across Ontario must be wondering how their premiums will be affected if we ditch the postal code system.

It might save you money, but it might not

If Ontario gets rid of postal codes as a factor pricing car insurance, a driver’s home address will no longer be used to determine their auto insurance rate. This could help some drivers in expensive areas like Brampton, where rates are much higher than average, find some relief.

Why only some? Because even if territorial rating is discontinued, insurers price their premiums based on their costs. Instead of those costs being more weighted on drivers in higher-risk neighbourhoods, they’ll simply be spread out among everyone more equally, meaning drivers in lower-risk neighbours will pay higher premiums. Insurance pricing is all based on risk.

The Insurance Brokers Association of Ontario recommends the government be cautious when it comes to auto insurance reform, including territorial rating. Brett Boadway, the director of operations at The Insurance Brokers Association of Ontario, told us that regulators in the province have to get their ducks in a row before a massive change like this goes into effect.

“FSRA [the Financial Services Regulatory Authority of Ontario] should make sure they are organized as a regulator before they move into changing the way rates are regulated in Ontario just so that they have the appropriate levels of control in place … so that it does not cause dislocation within the marketplace.”

Boadway explained that dislocation in the marketplace could allow unfair advantages to bigger insurers and less choice for consumers.

“For example, the larger companies, in an attempt to increase their market share, could drop their rates wildly low and put smaller companies out of business. With less competition in the market, consumers who thought they were getting a deal could be left in a less positive position as companies could jack rates right back up to where they should be after a short period of time.”

All of this to say that if a major change like this happens, it needs to be planned well, because there are a lot of risks of it going wrong and hurting consumers in the end.

Limiting the impact of postal codes with regulation

Boadway and the IBAO recommend simply modifying how much a driver’s postal code affects their rate.

This could mean treating the province as one big territory. That would spread the costs incurred by claims evenly among drivers across the province, but also cause premiums to rise in some areas.

New technology could also change the way territorial rating affects premiums. Telematics and pay-as-you-go insurance could soon make it a lot easier to monitor driving patterns and determine rates based on the actual risk posed by individual drivers. Unfortunately Boadway says, the tech is simply “not there yet” in terms of developing working alternatives for determining risk. “There’s definitely technology on the horizon that could drive some of these decisions for us, but at this particular moment in time we’re not there yet. We don’t have the data to justify the rates using that technology yet.”

Axing the postal code system wouldn’t actually make car insurance cheaper

While getting rid of the postal code system might be a popular political platform in ridings where car insurance is high, simply eliminating it won’t lower car insurance premiums in aggregate.

As mentioned, the costs would likely simply be offset to drivers in lower risk premiums. That means rates in Ontario would remain among the highest in Canada.

One way to actually help lower rates would be tackling fraud, which contributes to the province's high average.

Car insurance company Aviva, for instance, has pointed to the need for the province to tackle the widespread fraud in industries tied to auto insurance claims in the province. A report last year found that Ontario drivers are saddled with $2 billion in extra costs as a result of that fraud.

The average driver pays anywhere from $100 to $150 more a year than they have to. The report found that fraud can be found happening at auto body shops, doctor offices, lawyer offices and even with accountants. Fraud often involves claiming non-existent costs when an accident happens, or even staging an accident, so that the parties involved can pocket accident payouts.

“[They] can coach claimants to exaggerate injuries to take advantage of accident benefits that they then take a percentage of for their services,” the Aviva report said. “Some have unwitting patients sign blank treatment orders that they then submit to insurers to obtain payment for services that were never provided.”

It’s clear that whichever party is elected will have their work cut out for them tackling Ontario’s high premiums. And change won’t happen overnight: if the winning party axes the postal code system, expect a big delay between the election and when that happens.