Sunday, 26 January 2014

Multi-car insurance

This is something else where I am amazed that they get away with it.

Assuming you are a two-adult household with two cars, it is usually cheaper to insure both cars with the same insurance company, and if you are a many-car household, much the same applies, you get discounts for each additional car.

However, it strikes me that the discounts are nowhere near big enough, because the marginal extra risk associated with one extra car is negligible, it is only the number of drivers which really matters.

Taking a two-car family (like mine), a lot of the time we are both in her car or both in my car, while the other car is safely parked up at home. In other words, a lot of the time the total risk is much the same as if we only had one car.

And there are some journeys which one or the other of us has to make, like picking up the kids or going to the supermarket, so the fact that I am using my car at any moment means it is less likely that she will be using hers. The total number of miles we drive between us is barely higher for us having two cars than if we only had one.

It's the same with a single, unmarried car enthusiast who has half a dozen useable cars on his driveway, he can only be using one of them at a time.
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Ultimately, I'm not sure that compulsory private third-party insurance makes sense anyway.

a) There are three basic principles to insurance:

i. Risk spreading, where one specific party cannot bear the full cost if his project goes wrong, so he invites lots of other people to take a small part of the risk, and

ii. Risk pooling, where large numbers of people are running a very small risk of incurring what is for them a very large loss (like your house burning down). But from the insurance companies' point of view, that is not really a risk at all, they know that every year x,000 houses will burn down and that they will have to pay out £y million, so they divide that £y million by z million people with a house and everybody chips in a couple of hundred quid a year to a common fund.

iii. Self insurance. If you only own one home, you have to have fire insurance. However poor value it is, you wouldn't be able to sleep at night if you didn't have it. But what if you are Prince Charles and own thousands of homes? You know perfectly well that every few years one of them will burn down. It's cheaper paying for one to be rebuilt every few years than is to pay for insuring each one.

(Of course, we have to have some sort of criminal sanctions for unduly reckless drivers who kill or hurt somebody, or even if they don't, separate topic.)

b) But as most households own a car or two and nearly everybody is at risk of being hit by somebody else's car, whether as driver, passenger, pedestrian or owner of physical property, and the amount of damage you suffer as a result of a collision bears little relation to anything apart from sheer blind bad luck. This brings us safely into the realm of self-insurance - not for each individual but for the UK population as a whole.

(It's not like fire insurance where each owner has some influence over the risks, i.e. if you own a big house the total potential damage is much greater than if you own a small one; if you install loads of fire alarms, your risk is lower than if you don't etc.)

c) And the total amount of damage caused by thirty million vehicle owners to the rest of the population is a fairly stable figure (and tiny as a % of GDP). For some reason, the cost is recovered only from car owners, even though non-car owners are also at risk (of them or their front wall being hit).

d) So if you ask me, it would be cheaper and more efficient to bypass the insurance companies and just fund the third-party element out of general taxation (or out of fuel duty, or whatever seems appropriate), that way absolutely every risk is pooled in the same place, administration costs are minimal because you don't need dozens of separate companies collecting hundreds of millions of payments a year, you don't need expensive advertising.

e) This logic does not extend to fire and theft insurance, those are specific risks over which the owner has some control, the same as with fire insurance for your home (see above). There are plenty of people (like me) who simply don't bother with fire and theft insurance for their cars because worst-case having to spend a couple of grand on a replacement is well within my means, meaning that people like me wouldn't need this faff with insurance every year. Her Indoors is a bit more car-proud than me, so she probably would insure hers for fire and theft (even though I wouldn't bother with hers either), fair enough.

f) The only downside I can see is that insurance companies would lose a huge source of easy revenue… oh, right.

23 comments:

Curmudgeon said...

Surely a lot of risk is mileage-related, so a two-car household where both drivers commute to work by car incurs a lot more risk than a one-car household, even if it contains two drivers.

Mark Wadsworth said...

C, indeedy, hence my suggestion to cover the costs out of fuel duty.

Curmudgeon said...

There's a lot to be said for that, but there is a concern that it would create a moral hazard in that irresponsible people would be absolved from the consequences of their actions.

Mark Wadsworth said...

C, but we have a system for that, its called the criminal justice system.

So currently, young driver pays £1,000 extra because we know they are higher risk (especially young men). It's the insurance companies profiting from that.

If they do something stupid, then they get punished accordingly, we already have that system in place, but every £1 extra they pay to private insurance companies is £1 less that they can pay in fines to the common pot to reimburse people for damage caused.

Mark Wadsworth said...

C, thinking out loud here, we can solve the young driver/high risk problem thusly:

Instead of them paying £1,000 a year extra insurance premiums (which similarly creates moral hazard), we could ask people who just got a licence to pay £1,000 into an escrow account.

If they have an accident, they lose what's in their account and have to pay £2,000 next year.

For each year they drive accident-free, the payment is reduced by 20%, and if they manage five years accident-free, they get the whole amount paid back.

The Stigler said...

For me, it kinda works - you have to have it, but you have multiple suppliers available, all competing for your business.

Sure, they make a profit (but the margins aren't great on motor) but if the state did it you'd then have waste.

Mark Wadsworth said...

TS: "if the state did it you'd then have waste"

Depends what you define as 'waste'.

My point was, what if the government abolished the statutory requirement to pay third party insurance? Without this, a lot of insurance company income would dry up.

The govt i.e. the taxpayer pays for most of the costs (repairing roads, medical treatment, police, disability benefit) anyway, so why not go the whole hog and have them pay for whatever-it-is that insurers pay out for on third party claims as well?

The Stigler said...

Mark,

So, are we going to charge an 18 year old the same for having a Golf Gti as a basic Vauxhall Nova, even though one has higher costs to insure at the moment because of higher risks?

Mark Wadsworth said...

TS, is there a huge difference in terms of the costs that either might impose on others?

Most Golf GTI drivers never hit anybody, neither do most Vauxhall Nova drivers. But if they do, the costs are a random amount between £50 and £5 million, just depending.

Some sort of vague correlation, but a tad unfair to make all Golf GTI drivers to pay for the sins of the minority.

And that's why we could have a bond scheme, where you pay into a pot and get it back after five years accident-free.

The Stigler said...

Mark,

"Most Golf GTI drivers never hit anybody, neither do most Vauxhall Nova drivers. But if they do, the costs are a random amount between £50 and £5 million, just depending."

But clearly Golf GTis have a higher total due to their higher premiums.

And I don't think your bond idea is without merit, but isn't that pretty much how no-claims discounts work now?

Mark Wadsworth said...

TS: "I don't think your bond idea is without merit, but isn't that pretty much how no-claims discounts work now?"

Yes, that's the whole point. Only instead of the insurance companies snaffling the earlier higher premiums, you get them paid back as a reward for good behaviour.

Curmudgeon said...

No-claims discounts mainly relate to comprehensive insurance for own damage. Interestingly, if you're claiming for third-party damage, your excess doesn't apply in general.

FWIW I think there's a lot to be said for the idea of putting third-party insurance on to fuel duty. The cost is in what you hit, not what you're driving. Most drivers would still want own damage insurance on top of it. But it's impossible to avoid the concern about the moral hazard of 17-yos driving Porsches.

Mark Wadsworth said...

C: "it's impossible to avoid the concern about the moral hazard of 17-yos driving Porsches"

How many 17 year olds can afford Porsches?

If it's a genuine concern, you could have a paternalist rule that restricts people to driving lower-powered cars for the first couple of years after they get their licence.

Methinks that somebody who would have driven like a twat if he had a Porsche would still drive like a twat in Fiat Panda.

buildingstoat said...

I believe that New Zealand has a similar system to the one you suggest with insurance voluntary. They also seem to have the attitude that most accidents are just that - accidental.

ps I have no house insurance at all and sleep just fine.

The Stigler said...

Mark,

How many 17 year olds can afford Porsches?

If it's a genuine concern, you could have a paternalist rule that restricts people to driving lower-powered cars for the first couple of years after they get their licence.


If you're talking about an old Porsche (e.g. a 924), probably most of them. Or, more realistically, a Clio Sport starts at about £1500.

And isn't it a bit restrictive? If someone 21 years old can afford to cover his risks, why shouldn't he?

The Stigler said...

Mark,

Methinks that somebody who would have driven like a twat if he had a Porsche would still drive like a twat in Fiat Panda.

But the premiums are higher for a more powerful car - that's why kids all drive around in Pandas.

Kj said...

I looked at the stats for car-insurance in Norway (all car-related, from liability to theft etc.). Annual premium in 2012 was 1,5 bn GBP (300 per capita), claims payout were 1 bn. Non-claim costs were 3 bn, and the rest was profit (16,5% of premium + investment income). That was the highest profit year the statistics shows, the long run average at 8,5%.
It´s not excessive profit IMO, it has been negative for some years as well. I´d agree that non-claim costs seem to be quite high, but I assume the large part is from non-liability insurance, that make up the bulk.
I don´t know, all in all I think it seems like an ok deal, merely the lack of politics and debate around premium risk-adjustment policy is probably worth the profits they get away with...

Mark Wadsworth said...

TS, yes, the insurance companies practice price rationing, and let's agree for the sake of this discussion that this leads to better outcomes.

Why is it so much worse of the government, on behalf of all potential victims, practices price rationing on their behalf?

Why is it better for insurers to profit from costs borne by everybody else than for the government to collect the extra money from youngsters with egos?

Kj, I didn't say the insurers made 'excess profits' (bearing in mind those are their figures and they would say that, wouldn't they?).

But why shouldn't everybody get those profits/save those costs?

a) without the government telling people to take out third party insurance, by how much would the insurers' income fall?

b) if people genuinely believe that insurers do a brilliant job at price rationining, why not abolish the minimum driving age and the requirement to even have a licence and let the insurers sort it out?

The Stigler said...

Mark,

Why is it so much worse of the government, on behalf of all potential victims, practices price rationing on their behalf?

Why is it better for insurers to profit from costs borne by everybody else than for the government to collect the extra money from youngsters with egos?


Because the alternative is a state monopoly that won't improve its service or efficiency that will cost even more by paying for more civil servants and more profits to large, inefficient consultancies to run the systems.

Mark Wadsworth said...

TS, OK, let's start from the very beginning.

The government practices non-price rationing - you can't have a driving licence until you are 17 and have passed a 'test'.

Do you think it would be better to abolish these requirements and have insurance companies sort things out with price rationing?

And if so, who would bear the cost and who would make the extra profits?

The Stigler said...

Mark,

I'm not in favour of abolishing the test as untrained drivers pose a significant risk to the lives of others. Whether the age should be 16 , 17 or 18, I'm not sure.

Kj said...

MW: no, I didn´t quote you saying they made excess profits, or the insurance industry saying thay didn´t. I´m merely saying that the car-insurance market seems to be competitive enough compared to other generally non-mandatory insurances.

I aree from the outset that the liability insurance bit might be just as well provide as a govt scheme, since the costs are quite predictable, and the variations are abysmally small compared to the state´s total means. Another matter is that the state has some incentives to improve road safety etc.. *But*, as we´ve discussed before, this could be provided as a public option in a market, that´ll go some way in enuring that some quango isn´t burning away the savings (if any) from doing so.
In Sweden they have a default insurance scheme, if you don´t insure for liability through a private provider. It´s shit expensive, but that´s because it is supposed to be a deterrent I think.

As to your bonded kids scheme, solved! Lots of insurance companies over here gives back the young driver premium if you´ve managed to drive without claims until you´re 23. It came on the market around the time I got my license, so I got free insurance for a couple of years.

mombers said...

MW, you should take a look at South Africa's Road Accident Fund to see the consequences of socialising third party insurance...