Saturday, June 05, 2010

Insurance Arbitrage

The BBC has a story about parents 'breaking the law' over insurance for their children because they don't believe a 400% risk premium is appropriate and proportional. The tone - and uncritical reporting - in the article seem to suggest that the BBC supports the insurers' position and that we'll hear more of this as they bitch and whine about how they can't screw more money out of the vast majority of the population.

The facts are that half of the population (41% admit to it, 61% would do so) are 'fronting' insurance because the punitive rates charged for an under-25 main driver are so completely ridiculous... and to preserve that cartel, the insurers are now resorting to the law. The law isn't there to protect your profits. If you construct a market with such piss-poor dynamics as to allow people to save 75%+ by a trivial arbitrage strategy, people are going to do that. And when it's half of the population, they are right and you are wrong. We call it democracy.

Some industry mouthpiece is quoted as saying:
"Yes, £4,000 is an awful lot of money but it accurately reflects the risk posed by young drivers"
which is utter bullshit. You do not have "accurate" risk statistics because at least half of your customers have been forced to lie to you because of your retarded pricing scheme.

You will note that insurers are still making a profit from car insurance, therefore the prices they are charging are sufficient to offset the risk and the costs of young drivers. Despite the fraud. Since half will admit to fronting, we can probably knock at least £2k off that price for the actual average risk premium received (and sufficient to be profitable). And, hey, doing that might just encourage people to do things by the book...

If not, then there's a good case for a state minimum insurance to guarantee access to the roads. This is the case in much of the US - e.g. the State of California will provide insurance to meet the minimum statutory requirements, since (like here) it's a legal requirement to have proof of insurance to be allowed on the roads. The current situation, which allows insurers to price young people off the roads and encourages fraud and driving without insurance, is ridiculous and needs to change.

If you can't make sensible profits from your oligopoly, then you shan't be allowed to have one.

- KoW

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