If ICBC were a private-sector monopolist, we would expect to see high prices and high profits. But ICBC is a public entity with no profit mandate and we observe the lowest prices for primary insurance for any province. What can explain these low prices?
A monopoly supplier is a larger organization than a set of competitive suppliers. Large organizations benefit from economies of scale. Monopolists of low-elasticity goods do not need to spend money on marketing. Competitive firms sometimes engage in price wars outside of price equilibria, which is a waste of resources when the war ends in a stalemate.
Private-sector firms are required by their owners or shareholders to “skim” profit off the difference between sales and costs. From the consumer’s point of view, this profit is an inefficiency (it would be cheaper to buy the firm’s inputs directly). Since ICBC has no profit motive, they should be able to provide their product for a slightly lower price. If ICBC suffers a shortfall in revenue, it will be covered by the taxpayers of BC.
Since primary insurance is legally required, the government would likely regulate a competitive market. This regulation, possibly in the form of a commission office, adds an additional cost to BC taxpayers. ICBC currently regulates itself, so essentially it may be impossible to privatize this function.
Insurers’ costs go down when the number and severity of accidents goes down. As a public entity, ICBC can directly offer policy advice on safety, for example the recent ban on cell phone use, to cabinet. A private insurer has more options for reducing costs and even an industry association does not have the lobbying power of a Crown corporation. BC should have less accidents with a public insurance agency than a competitive market, but it is difficult to calculate this benefit.
Car insurance provides opportunity for insider fraud. Despite recent high-profile cases, it may be easier to control corruption with public sector values than private-sector monitoring. Public servants believe that the social cost of fraud is higher than private employees. Lower fraud results in lower costs.
