Actuarial Notes

Compulsory Auto Insurance

Study guide: Exam 6C

Compulsory Auto Insurance is the legal requirement, in every Canadian province and territory, that a vehicle owner carry a legislated minimum package of automobile coverage before the vehicle may be registered or driven. The resulting "compulsory auto product" is defined by statute and regulation rather than by the insurer — what it covers, the benefit amounts and who may sue are all set by the province.

\text{Obligation to buy} \;\Rightarrow\; \text{Obligation to sell}

  • What is compulsory. Every province requires third-party liability to a statutory minimum limit — \$200{,}000 in most provinces. In the private-market provinces the policy also carries Statutory Accident Benefits payable regardless of fault and, depending on the province, Uninsured Automobile Coverage and Direct Compensation Property Damage. Collision and comprehensive stay optional. British Columbia, Saskatchewan and Manitoba sell the basic compulsory cover through a government insurer (Public Auto Insurance); in Quebec bodily injury is covered by the public SAAQ scheme, leaving private insurers the compulsory \$50{,}000 civil liability cover.
  • The product keeps changing — Ontario and Alberta. Since January 2024 an Ontario driver may opt out of DCPD, and from July 1, 2026 only the medical, rehabilitation and attendant care accident benefits remain mandatory; income replacement, non-earner, caregiver, housekeeping, death and funeral benefits became optional. Alberta's Automobile Insurance Act (2025) moves the province to a no-fault "Care-First" injury system, still sold by private insurers, from January 1, 2027. See Automobile Insurance Reform and No-Fault Insurance.
  • Why compulsion drives the rest of the regulatory structure. A mandate to buy is meaningless unless someone must sell, at a price the public will accept. So the province imposes the Take-All-Comers Rule, takes control of price through prior approval of rates and Risk Classification Restrictions, and needs a Residual Market — the Facility Association and risk sharing pools, or Quebec's Plan de Répartition des Risques — for the risks that price will not support.
  • The product is the cost lever. Because its contents are statutory, cost control happens by redesigning the product: a threshold and deductible on tort, the Minor Injury Guideline, the Catastrophic Impairment definition, the Fault Determination Rules. Each change is a pricing and reserving event, because it applies to accidents after its effective date while the claims already incurred keep the old benefits.

Which Coverage Responds? In Ontario, Driver A is stopped at a light when Driver B rear-ends her; under the Fault Determination Rules B is 100\% at fault. A's car needs \$8{,}000 of repairs and A has a soft-tissue neck injury. A's policy includes DCPD. Which coverages respond — and what changes if B had no insurance?

Answer B insured.

  1. Vehicle damage — A's own insurer pays under DCPD, to the extent A was not at fault (here in full). A does not claim against B's insurer; that is what DCPD replaced.
  2. Injury — A's own insurer pays medical and rehabilitation benefits under the SABs, regardless of fault. A soft-tissue injury falls within the Minor Injury Guideline, so treatment follows its protocol and cap.
  3. Pain and suffering — A may sue B only if the injury meets the tort threshold, and any award is reduced by the statutory deductible. A soft-tissue injury will rarely qualify, so in practice there is no tort recovery.

B uninsured. DCPD responds only where the other vehicle is insured, so the car is paid under the uninsured automobile coverage (or A's collision coverage, if bought). The SABs are unaffected — they never depended on B.

The pattern: the compulsory product routes nearly every small claim to the victim's own insurer, and tort survives only for serious injury.

A Statutory Minimum Limit That Is Never Indexed A province's compulsory liability minimum of \$200{,}000 has not changed in 25 years, while bodily injury severity has trended at 5\% a year. What is the minimum worth in the claim-cost terms of the year it was set, and what follows for pricing?

Answer

\begin{align*}
\text{Trend factor} &= 1.05^{25} \\
&= 3.386 \\[4pt]
\text{Real value of limit} &= \frac{\$200{,}000}{3.386} \\
&= \$59{,}060
\end{align*}

The minimum now buys less than a third of the protection it bought when it was set. Three consequences follow:

  • More serious claims pierce the minimum, so a victim of a driver who bought only the minimum relies on that driver's personal assets — the gap compulsory insurance was meant to close.
  • Most owners voluntarily buy far higher limits, which are priced with increased limits factors; the compulsory layer is an ever-smaller share of what is actually sold.
  • A fixed dollar limit caps severity, so basic-limits losses trend more slowly than total-limits losses. Applying an unlimited loss trend to basic-limits data overstates the indication.