Worries that a recession may soon come to Canada are on the rise.

Political turmoil in the United States could ding the Canadian economy, since America is Canada's largest trading partner. Lackluster GDP growth, weakening consumer confidence, and an inversion of the yield curve for Canadian treasury bonds are all additional warning signs that a recession may be on the way. While it is truly too early to tell whether a recession is right around the corner or not, recessions are inevitable. The last recession was more than a decade ago, so it is only a matter of time before the next one rolls around.

A recession can have all sorts of adverse effects on the average household. The prospects of layoffs hang over the heads of workers as businesses scale back or shut down. For those who hold on to their jobs, overtime and bonuses are typically curtailed. Overall households are forced to cut back on spending and find ways to save wherever they can.

With car insurance premiums in Canada at all-time highs, that particular line item in the household budget might become harder and harder to swallow in the throes of a recession. That begs the question, what happens to car insurance rates during a recession?

Will Your Rates Go Up or Down?

Will your rates go up or down in a recession? It depends.

A common practice among auto insurance companies is to invest a portion of the premiums they receive into stocks and bonds. During the last recession, the stock market crashed causing insurance companies' portfolios to dive. That led many insurers to raise premiums to compensate for their losses.

While premiums may see an uptick at the start of a recession, the law of supply and demand eventually brings premiums down. In Alberta, premiums rose 1.3% in 2009 over the previous year, but dropped steeply in 2010 and 2011, according to the Alberta Automobile Insurance Rate Board.

Because consumer spending is curtailed during a recession, that means consumers buy less new cars. They may also sell their existing vehicle to save money, or keep it off the road so they don't have to pay for insurance. With fewer car sales, there is less demand for auto insurance policies. During a recession drivers might also be tempted to reduce their coverage amounts to save money. To remain competitive, many insurers lowered rates during the last recession to attract new customers and keep existing ones from shopping around.

The bottom line for auto insurance rates in a recession is that they might rise for some at first, but overall premium rates eventually fall across the board. Drivers may find that a recession is an advantageous time to shop around and switch to a new auto insurer. That's because as demand for new policies falls, insurers must compete on price to bring in customers. However, you don't have to wait for a recession to roll around to find a better rate on auto insurance; compare rates on Rates.ca.

RATESDOTCA Team

The RATESDOTCA editorial team are experienced writers focused on sharing stories and bringing you the latest news in insurance and personal finance. Our goal is to provide Canadians with the information and resources they need to make better insurance and financial decisions.

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