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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.

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