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Vehicles enter and exit the Richmond end of the Massey Tunnel that connects Richmond and Delta, B.C., on Sept. 11, 2017.

DARRYL DYCK/THE GLOBE AND MAIL

The financial troubles of British Columbia's publicly owned auto insurance company can be traced back to a populist measure put in place by the Liberal government on the eve of the 2013 election campaign.

Drivers had been hit with rate hikes in 2012 that boosted premiums by more than 11 per cent to cover rising claims costs. Just weeks ahead of a tough campaign, then-premier Christy Clark enacted a "rate smoothing" policy, promising voters that future hikes in their vehicle insurance premiums would be smaller and more predictable.

The policy, which curbed the ability of Insurance Corporation of B.C.'s independent regulator to ensure premiums were enough to pay for services, masked a problem in subsequent years as the number of accident claims, the cost of settling injury claims and the cost of repairing vehicles increased rapidly. The policy has held ICBC to rate hikes that average 5.5 per cent annually, when it has needed rate increases in the double digits to pay its claims.

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"It's clear, in hindsight, that the rate-smoothing was a symptom of serious underlying problems at ICBC," Attorney-General David Eby said in an interview Wednesday.

By 2015, the gap between premiums and claims costs began to open up. ICBC said Wednesday it needs 11.2 per cent to cover basic claims costs, but it was allowed to increase its basic insurance rates by only 5.5 per cent. In 2016, ICBC says, rates increased by 4.9 per cent, although it needed 15.5 per cent. Last year, rates climbed by 6.4 per cent when costs climbed by 20 per cent.

Mr. Eby, whose NDP government took office in July, has promised to reform the insurance system to bring costs under control and it is expected to announce caps on minor injury claims and other measures this spring.

Mr. Eby said the Liberals should have tackled those changes instead of interfering in the British Columbia Utilities Commission's (BCUC) rate regulation.

"Had the BCUC been allowed to play that role, the signal of massive rate increases would have spurred government to action," Mr. Eby said. "By interfering in the BCUC's authority, they deferred and delayed the red flags that should have gone up to tell the public that there was trouble at ICBC. That means we lost three years of time that government should have been doing substantial, major policy reforms."

However, Mr. Eby said restoring the BCUC's independence won't come right away. "We also recognize that British Columbians can't afford to cover the current losses of ICBC if we don't do major surgery on the corporation. So we are going to do those operations to get ICBC healthy again."

Richard McCandless, a retired civil servant who has acted as an intervenor in BCUC rate hearings on ICBC, said it became clear average claims costs were rising dramatically starting in 2014 – not long after the government began to suppress rates at ICBC. "The government laid out a political model and opened up this structural deficit," he said. "The regulator wasn't allowed to set rates at the true economic cost."

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Injury claims were already driving up costs, but ICBC documents point to several additional pressures that emerged in 2014: An increasing number of claims were being reported, and the cost of vehicle repairs began to spike. At the same time, falling interest rates were eating away at ICBC's investment income.

Mike de Jong, who served as finance minister in Ms. Clark's government, said this week that his government did respond to the troubles at ICBC by commissioning an independent study of possible remedies by Ernst & Young, which was presented to Mr. Eby when he took office in July.

"There was no question the trend was higher costs for claims and a greater number of claims, so people were aware of that," Mr. de Jong said.

He said the NDP government has now had seven months to take action. "The government knows there is a problem and the sooner they get down to doing something, instead of looking for other people to blame, the better."

This week, ICBC took the unusual step of producing its third quarterly report in advance of the February budget. The report shows ICBC lost $935-million in the first nine months of this fiscal year, and forecasts that the deficit will rise to $1.3-billion for the full year. Based on those numbers, Mr. Eby has warned that he will have to introduce tough new reforms to avert massive rate hikes.

Mr. McCandless said where the Liberals were overly optimistic about ICBC's finances, the NDP government may have swung too far the other way. He said a significant portion of the change is attributed to outstanding claims – ICBC now expects to settle claims for far more than it anticipated.

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"The Liberals' budget for ICBC was ridiculously optimistic. Now the government is being more realistic, if not overly conservative."

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