[V8] Insurance scam...what? Again! Good Grief!

[Roger M. Woodbury]

Once again the naughty insurance companies have become fodder for one of
these car lists.  While I am never an enthusiastic supporter of the
insurance industry, and for sure think Geico and any other company that
actually trolls for automobile insurance is a "bottom feeder", there are a
couple of comments that I will make here.

First of all, without exception whenever these threads appear, the ONLY
thing that people talk about is the potential for getting paid for a simple,
and normally, small, physical damage claim.  They rail that they would
"rather fix their" car than to see their premiums jump after filing a claim,
OR worse yet, they found that the "actual cash value" of their car was less
than they thought it should be because of all the money that they had put
into the car.  

Insurance companies generally make NO money from issuing automobile
insurance policies.  Zero, zip, nada bucks.  Nothing.  Ok, ok, ok, then why
do they insure automobiles?  Cash flow.  Plain and simple:  cash flow.
There is no "art" to auto underwriting.  Insurance companies stand a better
chance of making money (which is why they are in business to begin with,
incidentally) by underwriting real property.  Most houses don't burn, and
despite the tragedy of the terrible Louisiana hurricane damage, those don't
happen all that often.  Commercial insurance is different, but the general
rules follow:  given their choice (which is not often the case), an
insurance company would rather underwrite a factory building, than the
general liability for the company that makes widgets within it.

Because, you see, one liability loss of ANY kind, wipes out any chance of an
underwriting profit for an entire class of risk.  So, in the case of
automobiles, let's say that you pay $1,000 per year for statutory coverage
as required by your state in order for you to drive your car.  For that
grand, you get basic liability coverage, plus collision and comprehensive
insurance on the family car, plus a few other things like uninsured motorist
coverage that covers YOU for the misdeeds of that scum bag who's van
insurance lapsed just before he knocked your wife off her feet in the
Safeway parking lot.

So, you and your wife are exemplary drivers, and have had no accidents of
speeding or other violations in twenty years of driving.  Good for you.  You
are a preferred risk driver.  Rightfully so.  That means for each of those
twenty years that you purchased TERM insurance for your driving exposures,
you actually didn't cost the insurance company anything for extending to
you, their huge reserves of money and legal defence capabilities that you
used for that first year, plus all the others, so that the accumulation of
your wealth, and the security of your family wasn't jeopardized by an
"accident" that was caused, in that one second of error, BY YOU.

Now, let's say that you have paid $20,000 over those twenty years for
coverage....a grand per year.  And let's say that you are still a "stand up
citizen"...go to church every Sunday, car pool for the girl scouts, don't
drink to excess EVER, and didn't even vote Republican in the last election.

But you are now twenty years older than in year one of our little case
study.  And what you don't know is that despite having a thorough physical
each and every year, like clockwork, the quack missed that little bitty
trace of macular degeneration that is creeping into your right eye....you
don't notice it either....

And then, driving home one fall afternoon, with the sun just dropping down
over Overdale Road, right at that hill, and in just exactly the right place
to shine past that gap between the rear view mirror and the tint in the
windshield right into your eyes in a purely blinding manner.  You don't see
the school bus stopped on the right side of the road with its lights
flashing until you are RIGHT THERE.  But your reactions are good.

You don't even see WHAT is stopped in the road in front of you.  It is just
THERE, and your reaction is to yank the wheel hard right.

You miss the school bus, but the car goes to the right side of the bus.
Three are knocked down and injured, which is the bad news, and the good news
is that the other five children got out of the way.  Nobody is killed.  No
damages are serious or life threatening.

The good news.  The police investigation finds you not entirely at fault:
the bus does not normally stop in that location, and is normally ten minutes
earlier than it was that one day.  You were driving at the proper speed, and
being blinded by the sun was a proximate cause of the accident.  Your
license is not suspended.  The macular degeneration will not be discovered
by the annual physical for another five years.

Now after it all, the insurance company pays for the medical expenses of the
three children.  The total of the charges is in excess of $330,000.  Don't
blame the insurance company.  You might blame the hospitals or the doctors,
but the insurance company had NO control over the cost of surgery, rehab and
attendant costs for this "minor" bodily injury accident.  Then there was
some special educational costs due to the loss of school time if one of the
most severely injured child, and the insurance company's share of that
was....yup:  twenty grand, or the sum total of all premiums paid by you for
the past twenty years.  

So that "little" accident cost $350,000, and wiped out the potential for
profit on the underwriting of three hundred fifty forty something drivers,
who go to church every Sunday, occasionally car pool for the girl scouts,
and basically only use the car to commute 23 miles each way to work.  For a
year.  In point of fact, not even the promise of a profit, because the
direct costs of investigation and claims processing are not included in that
$350,000 figure.  And since the damage to your car was only $937, you never
filed a claim for physical damage, and you recovered nothing for your
involvement in that entire event.  You did get paid for your testimony at
the hearings, of course...

Feel sorry for the insurance company?  Of course not.  That has nothing to
do with it.  The insurance company paid for the direct, compensable loss
caused by your accident.  In point of fact, the coverage that you had was
probably renewed without change in premium above and beyond what was normal
for that company for your class of driver and car.  You were still a
"standard" risk to the insurance company because there was no demonstrable
reason to non-renew you, that could have been construed as legal in most
territories:  you had ONE accident in twenty years, which was unfortunate,
but that was all.

So, how does an insurance company make money?  Well, by investing the money.
It is the "float" that earns a profit.  Normally, an insurance company is
considered to be doing well if the "underwriting profit" is less than 105%.
That is to say, that the company pays out in direct losses less than 105% of
the premiums collected.  

Obviously, an insurance company or its agency force can't spend a whole lot
of time examining each risk.  Thus if an application doesn't "fit", either
due to vehicle type, age or driving record of the driver, the policy
application is rejected.  It is also impossible for reunderwrite each and
every policy holder every year, so if nothing jarring occurs, the chances
are that once a policy is issued, unless something dramatic happens...like
an accident or perhaps an OUI after the Christmas party in the office,
coverage will be automatically renewed.

The point of this little fantasy is that automobile insurance is a simple
purchase of term insurance against a catastrophe loss.  Automobile physical
damage coverage is the smallest part of what a policy provides. In terms of
the quantity of coverage afforded, automobile insurance at "standard" rates
for  a given territory, can generally provide terrific value for the dollar.
Considering the damage that one vehicle can cause to others, and the density
of high velocity traffic, I think that the automobile insurance product
represents great bang for the premium buck.

Now, having said that, I am really pretty luke warm about companies making
donations to policing organizations for enforce traffic laws. While I
understand the interest that insurance companies like Geico have in reducing
the number of speeding losses, I have witnessed far too many police cruisers
using radar in sparcely populated areas, when "local" traffic in town is
moving far to fast for the driving conditions prevailing.  Here in Maine, if
you drive one hundred miles on the Maine Turnpike or on Interstate 95 and
you stay above seventy miles per hour that entire distance, you will
probably get stopped and fined for exceeding the speed limit.  But on Route
One in Hancock, which is a two lane road through the little village, cars
routinely travel sixty miles per hour and more past my retail property.
There is NO local law enforcement, and neither the Sheriff nor the State
Police have adequate resources to really enforce the 45 mile per hour limit.
Perhaps Geico's money could be better spent by helping to build speed bumps
in congested areas, rather than just buy electronic toys for the police to
wave around.

Roger