The Insurance Corp. of British Columbia (ICBC) has recently suffered significant losses. These losses have been offset by transfers from its optimal business. But without transfers, the basic business capital would have fallen below the regulatory minimum. Even worse, optimal business has also suffered a loss.
ICBC is a Crown corporation managed by the province of B.C. Established in 1973, its mandate is to provide provincewide, universal, affordable and compulsory public auto insurance.
It has, however, failed to ensure affordability – insurance rates in B.C. are the second highest in all of Canada and are forecasted to be the highest by 2020, all things being equal. This can be traced to management and operational failures – and taxpayers bear the brunt of those problems.
The Frontier Centre for Public Policy recently released a research paper in the Public Choice Alternatives series on the valuation of ICBC.
Even though ICBC can generate free cash flow (an important factor for growth and survival of a corporation), that cash flow is not significant enough to result in a substantial intrinsic value, which is based on robust and growing free cash flow.
Worse, ICBC isn’t showing evidence that it can generate profits and convert that profit to ready cash for operational demands.
According to the valuation, ICBC could be worth as much as $15.8 billion today if the province decided to divest the corporation. But the same analysis shows the corporation could be worthless if the province decides to keep it. This position is further worsened by the fact that ICBC can’t restructure and price its insurance premiums to cover expected accidents and losses.
The corporation’s estimated fully taxed value ranges from $3 billion to $17 billion, with a mean value of $8.95 billion and a median value of $8.99 billion.
As non-government auto insurance is profitable in most regions of North America, private companies could better, and more profitably, serve British Columbians’ motor vehicle insurance needs.
In 2017, ICBC had $1 billion loss and it’s widely projected that it will suffer a loss of about $1.3 billion this fiscal year despite plans by the provincial government and ICBC management to stem the tide.
ICBC’s reason for being is no longer valid. At the time of its formation, government cited the cost of accident litigation and the congestion in the court system under private insurance for the need for ICBC.
It would be far better now if private investors took on the risk.
The provincial government should initiate a plan to make ICBC a commercial, profit-generating firm. It needs to optimize its operations to make it attractive to private and institutional investors.
Ultimately, however, it’s up to the taxpayers to tell their elected officials that the crown corporation should be divested.
In the meantime, the province should make sure ICBC can turn its profits into ready cash.
With the province’s growing debt and other spending priorities looming, proceeds from selling ICBC could soon be very useful for B.C. and its taxpayers.
Ian Madsen is a senior policy analyst with the Frontier Centre for Public Policy. This commentary was co-authored by FCPP intern Anderson Agbugba.