Question

Answer critical analysis questions.

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

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.