Car insurance, how much should I Pay in premium?

The question of how much you should pay for insurance, or for the premium of an insurance policy is like one of those bad philosophical ‘unanswerable’ questions like: Does a tree falling in a forest where nobody can hear it make noise? How what is the sound of a one handed clap? Or the classic ‘How many angels can you fit on the head of a pin? In other words it is hard to say. Like many of the questions we offered as illustration many could not car less for their insurance details. They view it as a necessary evil and not worth the time to fuss over.

Of course unless you are seriously wealthy (and even then it would silly) you should not ignore the issue of insurance. But calculating how much you should pay is a surprisingly difficult question to answer. The main reason for this is that insurance is not a tangible asset or good. You can work out the price per kilogram of each brand of a certain product. You can’t always determine qualitatively the price/value relationship of a certain policy. Let me illustrate, when buying a dishwasher soap at your local store you might take various factors into consideration, 1) The price, 2) The quality of the product, how well it cleans, 3) The impact on the environment and any other number of issues you care about in the soap department.  However with car insurance it is by no means so straightforward.

The main reason for that is that insurance may not be used, covers such a large set of potential circumstances it can never be comprehensive for every situation. Insurance companies try to put a price (the premium) on the possibility of  maybe having to  cover some unknown expenses incurred to some unknown random accidents. Would you like to put pen to paper and calculate that? Let me warn you it is not difficult. Even the best cost estimators and risk assessors need to allow for huge error margins.

All of this waffle means one thing to you, you are going to have to do your own research. Calculate what you need to insure, how much it is worth and what deductibles can you afford to place on the insurance. Then get this data and send it to at least five insurance companies. It is a good idea to spread the companies you send your request to along the car insurance spectrum. Then check the prices and go for the best price/quality ration. It is hard to tell the quality of a car insurance company until you actually need their help. This uncertainty can be curbed by checking past history with other clients, searching for past cases and the report the company receives. This way you will have a good idea of the going rate and will be able to shop accordingly.

As you can see how much premium you should pay depends on who you are, what you want to insure and much it costs.

Are low cost car insurance companies any good?

Asking if low cost insurance companies are good is like asking if cheap airlines are good. Some might answer without a thought, No, they are rubbish. Others have a cult like attraction to some of the low cost companies that have started operating in the last years. The answer as you probably expected is boringly non-committal, it depends. Just like the quality of a low cost airlines depends on their safety record, maintenance policy, staff training and many more factors that are not necessarily divorced from offering a lower price.

However it does become suspect when companies can offer the same or better at a lower price. They either have geniuses for managers that are using a secret method, are willing to work on a narrower profit margin or you are being ripped off (i.e. being cheated) or will be ripped off when you actually need to claim a policy.

The truth is that Car insurance is as much a science as an art. There are all kinds of mathematical models and equations that attempt to calculate risk and variables clients possess. For instance, an insurance company will be interested in calculating how much more expensive it is to provide insurance for a man than for a woman, a twenty year old or a forty year old. Their calculations will affect the prices of the premiums for the policy holders, how accurate the models are will define the success of the company. The point of this paragraph is that there is room for variety in car insurance, a company can be cheaper because they have a better (or worse) grasp of the prices and costs of a particular insurance.

A useful comparison is a construction company. Construction companies must provide the client with a quote for the work they are asked to price. Before they give a quote they must think about how much they will have to invest to get the job done. In order to do this they will have to have a good grasp of the cost of things, from the price of a nail to the wage of a joiner. The more accurate the costs estimate the better the price and the more chances the company has to prosper. If the company’s price is too low it will lose money, if it is too high they will probably not get many jobs as they will be outbid by the competition.

It works similarly for insurance companies. If they try and cut down on the trimmings and spend smartly they will be able to save a few pennies, as low cost airlines do by not offering movies or a decent meal. However the final factor in determining if they will be successful as a company and as an insurance provider is their ability of getting a feel of the market, the cost and risk of insuring a policy holder.

So what can we say about our original question. I’m afraid it’s still, it depends.