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Why Is Car Insurance So Expensive?

by | 4th, August 2011

WHY is car insurance so expensive? There are reasonable ways of asking that question: reasonable answers to such reasonable queries too. Perhaps there’s not enough competition so monopoly profits are being earned. Perhaps interest rates are too low?

No, seriously, in a competitive insurance market the insurance companies don’t make a profit writing insurance. They almost always make an underwriting loss in fact. However, they get your money early on and only pay out later if an accident happens. So they’re got pots and pots of money lying around waiting for a claim: and they can invest this and make a profit on investing it. Which is what they do and which is the real secret of Warren Buffett’s wealth.

However, when interest rates are low they make smaller profits on their investments and thus they can tolerate smaller losses on underwriting and so the price of insurance goes up. All very complicated but still reasonable.

Then there’s idiot questions about why is car insurance so expensive: like this one in the comments at The Guardian:

How stupid is it that car insurance costs more every year than some cars?

Think about it for a moment.

Yes, that’s right, the cheapest car insurance you can get, the one you must get in fact, is third party cover. Not insurance for your car at all: insurance for the damage you might do with it, not insurance for the damage you might do to it.

Crash the car and third party doesn’t pay out for your car: it does pay out for the bloke whose neck you’ve just broken. And yes, his neck is worth more than your car.

Which is why car insurance is so expensive: because you’re not insuring the car, you’re insuring the rest of us against being crashed into.



Posted: 4th, August 2011 | In: Money Comments (5) | Follow the Comments on our RSS feed: RSS 2.0 | TrackBack | Permalink