A Time of Magic

Insurance is a peculiar product when you think about it.

Effectively the insurance company are betting that they can charge you more than you will cost them. Given that there are lots of insurance companies around in the various insurance markets, competitive forces act to keep them from charging you over the odds to take the “bet” ie your insurance premium but that conflict of interest between you and them still remains.

Many people take account of this conflict in interest and self-insure when the option is available to them. In the long term, it may be cheaper for you to do that (ie pay out for whatever claims might have arisen) especially when the government adds taxes to your insurance premiums and thereby loads the dice even more against you. Another very viable option is to increase the amount of “excess” that you’re prepared to pay before the insurance kicks in which is particularly popular with health insurance. For example, whilst a normal health insurance contract will pay out everything but the first $100 or so of a claim, some insurance companies let you increase your personal payment up to $5000 which means that you’ll pay for the small things yourself but they’ll end up picking up the tab for the biggies such as heart surgery and so on.

However, in a number of key areas self-insurance is illegal, notably in car insurance but also in some countries for health insurance too. Since it’s illegal not to insure in these areas, competitive forces are reduced and thereby you end up paying more or receiving less than you would do otherwise. However, whenever an accident occurs you’re immediately in conflict with your insurer as clearly you want the maximum payout whilst they want the minimum one. To counteract this, “independent” assesors to place a value on your car after an accident but that independence is limited in that the insurance company both selects them and pays their fees so clearly there are downward pressures on any estimate that they might come up with.

For example, take a car bought for $10,000 that’s written off two years later in an accident. Typically, a used car of similar age could be bought for around $5000 but the typical payout offered is more like $3000 after you take account of the deductible (ie the amount you pay before the insurance kicks in).

This entry was posted on Thursday, January 17th, 2008 at 9:57 pm and is filed under Technology. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.