Car Insurance

This is one of the products that people start using quite early in their adult financial life; usually before they are prepared and educated for the murky world of finance. The car is the symbol of adulthood and independence, and insurance, along with registration, petrol and maintenance are the costs of independence.

(This is a repeat from the home and contents insurance post if you have already read that)

Insurance is a spreading of risk across a community or some sub-set within the community. We know that a percentage of people will be hospitalised every year, or die or become incapacitated, or their house will burn down, or they’ll have a motor accident. We just don’t know which people. So the community contributes in advance by paying premiums to cover these and other risks. The premiums are pooled by the insurer and claims are paid out of the pool. The insurer invests the funds in the expectation of increasing the size of the pool and covers overheads and profit from it.

Most forms of insurance are risk weighted. This means that people are assessed for their risk, paying a higher premium if they are assessed to be higher risk. With life insurance, for example, you are assessed as higher risk if you have a serious pre-existing health condition, are overweight, smoke, are in a high risk occupation and you’re old. With that mix you would pay a very high premium or be refused cover altogether. Other types of insurance have different risk factors that effect the premium paid. Effectively you are being pooled with people like you.

The exception is private health insurance which is community rated, meaning that everyone pays the same premium whether they are young and fit or unhealthy and aged.

The key to insurance is that your claim is paid if an event occurs for which the policy provides cover. These events are defined in the policy document and the product disclosure statement, together with the exclusions that apply to the policy generally or specific exclusions that might apply to individuals, like pre-existing health conditions. (The latter are most likely to exist in the life insurances.) What am I covered for, what am I not and how much do I get.

The fewer exclusions, the broader the cover and the higher the benefit paid, the higher the premium will be.

Risk is assessed and the premium set in the underwriting process. The underwriter, supported by the actuarial risk analysis, either accepts the risk (agrees to sell the policy) or not, and sets the premium and any special exclusions.

Unlike most products bought, with insurance you get no immediate good or service. What you receive is a promise that if a future event occurs, you will receive a payment. If the event does not occur you receive zero payment, even if you have been paying premiums for 30 years. Does this mean you have lost? No. The events by their nature are not good news and you have won by avoiding them. You have also had the benefit of peace of mind that if one of these undesirable events occurs you will at least receive some financial support. This enable you to get on with making the best of your life.

So, even non-claimants receive a benefit. Rightly, they expect the insurer to enforce the exclusions in the policy and require definitions of events to be adhered to, so that premiums don’t escalate. Sometimes this principle gets lost in the emotion of a refused claim.

Not much mystery here. Car insurance provides cover for theft of the car, damage through fire and damage from an accident. It also covers you for damage to other peoples’ property if you are found to be at fault.

It does not cover you for liability for damage caused to other people as a result of you being at fault. Personal liability for this risk is covered by compulsory third party insurance (“green slip” in NSW), and is usually bought in concert with your registration of the vehicle.

It is illegal to drive your car without compulsory third party insurance, whereas you can drive without car insurance.

There are two styles of car insurance:

• Comprehensive car insurance, which covers you for damage or loss of your car and damage to other property in the event of an accident. Most commonly you are insured for market value of the car in the event of writ-off, otherwise for the cost of repairs. Agreed value for more collectable models is available but usually at higher cost.
• Third party fire and theft cover, which covers damage to other peoples’ property, theft of the car and fire damage to the car, but not damage to your car in an accident.

The latter exists because of the long tradition of lower value first cars for young adults and the high cost of comprehensive insurance for the same group. The high cost of covering for accident in this group means that owners can choose to self-insure for damage to their own car, an in-the-know way of saying that they have done their dough if the accident is their fault. That can be a valid decision, but few people would be capable of absorbing the cost of the other vehicle written off in the accident if it was a $300,000 Ferrari. Hence third party fire and theft insurance, covering the other guy’s Ferrari.

The premium you pay reflects the risk. The probability of you claiming and the likely $ value of that claim will determine whether you will be offered cover at all and the premium you pay. Teams of actuaries crunch the claims numbers.

The risk factors are a mix of factors that relate to you specifically and demographics that lump you in with people like you.

Personally, what is your driving history. If you have made claims and they are recent, you can expect to have your premium loaded (it is higher than for other people like you).

Demographics that lump you into a class of risk:

• Age – younger drivers pay higher premiums
• Gender – young males pay more than young females
• Postcode – some areas have more claims, through theft risk, the people who live there, likelihood of storms and hail or just because there are more claims
• Make and age of car – because it effects the $ value of the claim, the likelihood of theft and the type of driver they attract and driving behaviours
• Garaging of the car – higher risk for on street

So, a young male driver can pay 3 or 4 times the premium of a 45. Not so fair to the young driver who drives with the care, wisdom and skill of a 45 year old, but as a group that is the experience of the insurance company.

Nor is the young driver subsidising the 45 year olds. Lumped in with a group of 25 year olds, the premium pool has to be big enough to pay claims from the group, cover a share of overheads and make a profit. Competition in the industry should drive out (pardon the pun) subsidisation.

This all sounds discriminatory, but it is the reality of “higher rates and costs of claims mean higher premiums”.

The other input into the premium setting process is the modelling of the owners buying behaviour to predict their propensity to switch insurers. If the answer is that they are unlikely to shop, the loyalty reward will be a higher premium. For this reason a renewal notice should never be accepted, without first obtaining quotes, even from the same insurer.

There are number of ways to keep the costs down:

• Apply online for a discount
• Choose a higher excess – excesses save the insurer on handling large volumes of smaller claims. By increasing the excess you become a self-insurer for small claims, purchasing insurance for larger claims.
• Avoid non-original parts and modifications which can put premiums up
• Only register young drivers as additional driver for one family car
• Do not necessarily insure for all the bells and whistles – replacement keys, windscreens, hire cars – reserving insurance for the big loss
• Garage your car

If you drive low kilometres, seek out a policy which gives a discount for that (though some of these discounts have been disappointing)

No claims bonuses / Lifetime no claim bonus – You get a discount for every year that you don’t have an accident for up to 5 years or so. But if you have an at fault accident you lose the bonus or part of it. The bonus is off a premium that has been adjusted for other risk factors and for the loyalty “penalty”. Forget about bonuses and look at the net figure you have to pay. As for “lifetime”, I don’t think anyone talks about this embarrassment any more, but they did 10 years ago.

Buy the kids’ car in mum’s name for a cheaper premium. It works, you get a cheaper premium. But if there is an accident and the insurer asks the right questions, you stand to have the claim declined because you fraudulently claimed the young adult as an additional driver. Better to go with 3rd party than risk no cover at all.

(This is a repeat from the home and contents insurance post if you have already read it)

Insurers fall into four categories

• Two huge multi-brand providers – Suncorp (GIO, AAMI, APIA, bingle) and IAG (NRMA, CGU, SGIC) – some of their brands are state based
• Other large traditional insurers – Allianz, QBE, Banks
• Challenger brands – Youi, Budget Direct, Real
• White labellers (an insurer manufactures the insurance product which is sold under another well known brand) – credit unions, Australia Post, Virgin, Coles, Woolworths

There are two other roles

• Underwriter – the party that guarantees payment of claims. It can be different from the insurance brand.

Reinsurer – the reinsurer carries an overlay of risk to assure that a single event cannot send an insurer broke or unprofitable. The event could be a cyclone. The way it works is if the total losses from the insurer across all insurances (car, home, business, etc) from the one event exceeds a $ figure the reinsurer covers the excess.

(This is a repeat from the home and contents insurance post if you have already read it)

Insurers make their money from premiums you pay and from investing your premiums, pending to pay out of claims.

Obviously they do well out of people who don’t claim. They do even better out of people who don’t claim and who renew their policy every 12 months without checking for better deals. Their repayment will go up every year. You will even find that a new customer will pay less than you with your driving record at your own insurer. Be part of the first group but not the second.

Insurers have great years when Queensland is storm free and southern Australia is bushfire free. These are the big natural disasters that dent insurers profits. It means that insurance can be a boom or bust business. Price for some storms and get none, you boom. Plan for some storm and get mega storms, you bust. Not quite bust, that’s where the role of the reinsurer.

After the mega storm season, your insurer’s renegotiation of the reinsurance contract will see that cost go up. Your premiums will follow, and it is likely to be across the market – it’s the same storm where you live irrespective of who you insure with.

(This is a repeat from the home and contents insurance post if you have already read it)

Car insurance has traditionally been purchased over the phone, and some insurers advise that around half of sales are still over the phone. However more and more purchasers are buying online, recognising that the product is not as complex as life or health insurance and taking advantage of the online discount and the superior opportunity to compare. In fact there are brands that only sell online.

Comparison sites are carving a niche in the market but that is all it is at the moment, and most have only a smattering of brands and/or are related to the brands listed. The industry has been slow to embrace comparison, having watched the race to a price bottom with commoditisation of car insurance in the United Kingdom. However the reality is that car insurance is less differentiated than other insurances and lends itself more readily to price comparison. Insurers aren’t likely to want to share their premiums with comparison sites, which could keep buyers off the insurers’ sites altogether.

The process can be painful, working through ten or more screens before a premium quote is delivered. Contrast this with travel insurance where a quote is delivered after entry of country visited, age of travellers and timing of travel.

Premiums are generally monthly these days. Some insurers do this without any addition to the annual premium. Though you could argue the reverse that some insurers do not give a discount for paying annually which is upfront.

An issue to be conscious of is the potential for the policy to be voided, leaving you uncovered, if there are inaccuracies in the insurance application. The application is accepted on the basis of the accuracy of information given. It’s not smart to lie about those speeding infringements.

An area where families have been inclined to be inaccurate is insuring for junior’s first car. To avoid the under 25 high premiums, the car has been purchased in mum’s name with junior only listed as an additional driver. This is technically insurance fraud and can void the policy.

(This is a repeat from the home and contents insurance post if you have already read it)

General insurers have faced the Banking Royal Commission in 2018.

The main issues on which they have been challenged are:

• Denial of claims
• Delay in handling of claims
• Policies that are not easily understood
• The high cost of insurance in cyclone prones areas like North Queensland