Tuesday, 17 December 2013

Car Insurance Premiums

From the BBC

The Commission has been studying the £11bn private motor insurance market for more than a year, following a referral from the Office of Fair Trading (OFT).

It agreed with the OFT that the system was not working well for motorists.

It found that premiums were pushed up because the insurer of a driver who was not at fault in an accident arranges for a replacement car or repair, but the at-fault driver's insurer foots the bill.

"This separation of control and liability creates a chain of interactions which result in higher costs for replacement cars and for repairs being passed on to at-fault insurers," it said.

"The Commission estimates the extra premium costs to be between £150m and £200m a year.

"There is insufficient incentive for insurers to keep costs down even though they are themselves on the receiving end of the problem."

Uh, what? The people picking up the tab have no incentive to reduce the cost? Really? Shareholders and managers of insurance companies would rather throw money at someone than have a bigger house? OK, you might say, the insurers will ultimately pass that onto their customers, but then, we have companies competing with each other to win customers. If they want their customers they have to be competitive with premiums, and that means making sure that their competitors don't take the piss.

The Commission believes that premiums could be reduced by £6 to £8 per policy if changes were made to the claims process.

So what we're dealing with here is the sort of amounts on a claim that no-one can be bothered wasting staff time and costs actually arguing about.

Insurers (in my experience) are pretty good at knowing the approximate cost of things. They often even insist on dealing with certain suppliers, e.g. one of the big hire car companies. And some of this includes setting the price at the higher end so that people aren't wasting their time arguing about the cost. So, maybe you get a car that costs £10/day more than it should, because it isn't worth people arguing the toss over a claim amount less than £50. And if you try to push the prices down, you'll just create more people arguing over cost which will frequently cost you as much as that.

If anyone really wanted to lower insurance costs, they'd be trying to get the government to drop their 6% insurance premium tax on car insurance.


Mark Wadsworth said...

This separation of control and liability creates a chain of interactions which result in higher costs for replacement cars and for repairs being passed on to at-fault insurers," it said.

Woah! Stop right there!

Let us assume there are only 2 large insurers, A and B, and each has half the market.

So there are four permutations of accident:
-both drivers (innocent and at-fault) insured with A
- both drivers insured with B
- innocent driver with A, at-fault with B
- innocent driver with B, at-fault with A.

In the first two cases, the same company is responsible for all the costs, so has every incentive to keep them down.

In the other two cases, the gains and losses probably even out.

And in a sane world, we can assume that the two companies would come to some sort of gentleman's agreement with each other as to what sort of costs they are prepared to pay without too much fuss, but it is in their common interest to agree on a tariff which is not too high (as you say, it is better to pay £10 over the odds than spend £100 bickering).

Further, there is (or we hope there is) competition between insurers. As long as barriers to entry are not too high (and I've never looked into this but as per usual would suspect they are absolutely colossal, closed shop and all that) it will all sort itself out.

"If anyone really wanted to lower insurance costs, they'd be trying to get the government to drop their 6% insurance premium tax on car insurance."

Yes of course. The bitter irony is that it is levied on the compulsory (third party) bit and not just on the voluntary (fire and theft) bit.

And I think the EU had a hand in pushing up premiums as well, I can't remember the details.

SumoKing said...

The problem is more the doctrine of subrogation which means;

Driver A crashes, puts his car in the hands of his 'reputable' insurer and incurs cost X to repair his car and scoot about for 3 weeks in a flash hire car, at a credit rate of 100-200% mark up on spot hire rate.

Driver A's insurer sends all the repair costs and hire charges to the insurer of Driver B.

Driver B's insurer cannot challenge the fee incurred by Driver A, EVEN THOUGH DRIVER A HAS NOT PAID ANYTHING because the action is brought by driver A on a subrogated basis to pay the contractually due amount of loss, to insurer of Driver A. Never mind that insurer A (and if it is RSA it has created a wholly owned subsidiary to charge extra admin fees to its own driver to inflate the value of the subrogated claim) has arranged and agreed all the favourable rates, kick backs and built in goodies.

It is odd that the Motor insurance industry has pointed to each and every thing, sore necks, credit hires, repairs, everything but the actual insurer for the cause of the increase in insurance premium.

Woodsy42 said...

As soon as the original referral was made insurance costs fell. In my case my car insurance fell by about £100. Similarly my classic vehicle policy fell by a third. So some good was done!
On the other hand my house insurance is now going up year on year, maybe they need investigating too?

DBC Reed said...

The Stigler defends the big corporations.No surprise there then.

Dinero said...

- Competition on the face of it can't help directly.
lets suppose an insurer decides to lower their premiums by reducing their outgoings to third parties -
they can't control that directly , they can play hard ball, but that ends up with what insurance companies try to avoid - -costly legal fees.
In civil cases of loss liabilaties and the size of reasonable reinbursement , the matter would be decided in court but The insurance industry tries to avoid legal work beacuse of the cost, and so a lot of hourse trading goes on instead, based on the likely recipracle nature of the claims between companies and such Gentlemans agreemanents could be a barrier to entry if the new guy is not allready in the buisiness.

SumoKing said...

"costly legal fees"

for property losses, i.e. repairs, hire cost on courtesy cars, the small claims limit is £10,000. In that track there are no recoverable legal fees, so an insurer can fit to the death an incurr perhaps a barrister's fee of £600, with no (unless they are utter arseholes through the process and the judge slaps them) risk of paying the cost of the otherside.

Bayard said...

"If anyone really wanted to lower insurance costs, they'd be trying to get the government to drop their 6% insurance premium tax on car insurance."

To apply simple economics to this:
insurers, like any other unregulated business, will charge what the market will bear. As with nearly all unregulated businesses, this is totally unrelated to their outgoings, so all this guff about claims is so much special pleading. If these Spanish practices were affecting the insurers' bottom line, they'd soon put a stop to them.
If insurance premiums are too high, it is because the barriers to entry in the insurance business are causing a cartel. This, possibly unofficial, cartel is what the Commission should be investigating, but the government likes barriers to entry and spends its time putting them up.

DBC Reed said...

Such was the cartel problem in Canada that the Saskatchewan Provincial government has issued its own public-sector auto insurance since circa 1945(?).Canadian provincial governments show traces of all kinds of past radicalism including Social Credit influences
in banking practices such as the Alberta Treasury branches which the Public Banking Institute in the US points to as good practice.
Those who claim to be pragmatic, and only interested in what actually works, on this site should consider these as interesting evidence to moderate all the private sector uniformity and triumphalism.

Mark Wadsworth said...

Din, SK, B, yes, that is how it works.

DBC, that was another idea I was thinking of. Seeing as the main purpose of the government is to provide low-cost mass-insurance, in the wider sense, surely it can't do any harm to have a govt-owned insurance company offering at least third-party (because it was the government that decided, probably rightly, that this is compulsory) on a strictly "very small profit" basis, if they thereby undercut the private insurers, then they will have to drop their premiums.

If the government makes a small profit on the deal, so what? It is still not compulsory to insure with the government and those profits go for everybody's benefit. And if it makes a small loss, again, so what, the government will get is money back a hundred times over via fuel duty* and the losses are evenly spread.

* We are told that the car insurance market is £11 billion a year, and the govt gets £30-odd billion a year in fuel duty.

Derek said...

@DBCR Agreed. In many cases all that's needed is for the public sector to provide a reasonable alternative to the private sector offerings. That will keep the private quality up and the private costs down.

So council housing to balance private tenancies; the BBC to balance private TV companies; public insurance to balance private insurers; the NHS to balance private healthcare; state education to balance private education, etc., etc.

It's not that the public alternative needs to be particularly good. It just needs to offer a baseline so that the private offerings have to be better in order to attract the punters.

Kj said...

DBC: agreed, Saskatchewan seem to have a lot of the crown companies for natural monopoly stuff, and it seems to work.
D the canadian: are they uncontroversial? Is there any politics around it? The SGI that is, being that it´s the sole insurer for the province for cars.

Derek said...

Not that controversial. There probably is some politics around it but not enough to really make any odds. Personally I'm not keen on monopolies, whether state or private, so I think that they should allow private insurers in. But as monopolies go, it's pretty benign.

Wish we had the public option in Alberta. Insurance here costs a fortune compared to Sask. So much for competition.

Kj said...

D: yes, odd that it´s a monopoly. I´m thinking setting risk ratings can be an issue when you are a government entity and a monopoly.

Derek said...

Straying a bit off topic, but not really. Alberta (like all the other provinces) has a public healthcare system. But unlike the NHS it is a true monopoly. Private healthcare for Joe Canuck is not allowed (although private contractors can and do provide services to the public system). Now there is a lot of politics surrounding that. In fact the last three (four?) Health Services CEOs have been given the boot because they have upset their political masters by showing a little too much interest in improving the service rather than toeing the party line.

But it seems to be more of an Alberta problem. I haven't seen anything similar in Saskatchewan.

Kj said...

D: I was specifically thinking about differentiation between customers based on age/sex etc.. I pay a third of what I did when I was 20, and it crops up every now and then as something politicians should "do something" about for equality reasons, but the politicians seem very happy not to have anything to do about it other than scoff at the "evil insurance companies".

Re health: but that´s another ball game again. Is the health services a provider or insurer? I hear that the ban on private healthcare is on the wane, in Ontario I think?

Mark Wadsworth said...

D: "all that's needed is for the public sector to provide a reasonable alternative to the private sector offerings. That will keep the private quality up and the private costs down."

Correct, that is a good starting point for a lot of stuff which are borderline public/private/merit goods - this general principle can be applied to lots of things.

Such as why bother with Obamacare? Just have the state provide a reasonable quality, low-cost option and that will force the private monopolists to either improve their service or cut their prices, job done.

A state monopoly is bad, but allowing a privatised cartel to run things is just as bad (just for different reasons), so let the two compete.

DBC Reed said...

Derek makes an eloquent plea for the old fashioned mixed economy which the post-war British state was founded on, where the private sector complements the public sector.
By bribing the electorate silly with unearned capital gains in the price of their houses the Tories and now their Lib Dem henchmen have succeeded in undermining the public sector completely:hence all the private sector triumphalism. Also the fascist corporatists hanging on in Europe ( and the Uk with Mosley's Union Movement) are also seeking to replace public control of the natural monopolies with corporate control which is much worse.

Dawn Brown said...

hope something similar in car insurance comes to india as well

Robin Smith said...

Insurance is a perfect scam. Pure rent seeking. Real price will never be discovered.

It seems to be for the benefit of society through private enterprise.

And its profits rise against the market under the veil of "protecting you".

So anyone who questions its profits in principle is seen as ruthless anti market.

But its a cartel. Where prices rise and quality of service falls, over time. There is no competition in it, except for a tiny margin shared between the end agencies.

I call this psychology "Ambulance Inflation"

Recently I asked the NHS for stats on emergencies, given the numbers have doubled recently but we're not dying in larger numbers yet.

It turns out 9 out of 10 emergency calls sirens blazing aggressively are not emergencies.

The thing is, whenever I pose the question "shouldnt we be looking at why this is", I'm shouted down straw man style for being so calous.

My response is to ask "OK, so how bad would it have to be before you found your spines? 99/100 calls are emergencies, or 999/1000?"

The NHS director agreed with me. "You are right, its a social problem, we dont know what to do about it, and we are not intending to either.

So the emergency service is another job creation example.

Interestingly I get flamed in the same way when I ask why people are abusing drugs so far beyond mere recreational levels.