Motor Insurance Rates and Risk Pricing
Here’s a very useful article from Cheaper Car insurance that explains why you might be either paying more than you should be for your motor insurance, or are in fact ‘getting a bargain’!
Avoiding Adverse Selection For Cheaper Car Insurance
If car insurance was available at the same price to everybody, regardless of the individuals risk, then those with the most risks and most to lose are more likely to buy car insurance than those who present little risk to a car insurer.
This is called adverse selection and if allowed to happen would leave a car insurer with a book of business that was paying out more in claims than the collective ‘pool’ or reserve fund was worth. The Car Insurance company would soon be out of business.
There are two checks on adverse selection in the UK Car Insurance Market that prevent this from happening.
The first check on adverse selection is the law of the land. No matter whether you are a risk or not, it is compulsory to possess at least third party liability car insurance cover to be able to drive on the roads in the UK.
Effectively this makes the potential size of the risk pool equivalent to the size of the number of people who have passed their driving test and own a car. In practice though this figure must be reduced by the estimated 1.5 million who choose to drive uninsured.
The second check on adverse selection and the most important in understanding how to get cheaper car insurance is from the Car Insurance Companies themselves.
Car Insurers employ actuaries and underwriters to protect themselves from adverse selection by attempting to measure each component of risk and charging more from the higher risks that are statistically likely to be involved in accident claims, or by refusing to cover certain types of car or driver at all.
Each and every question that you are asked when completing a car insurance proposal form is in some way connected to a rating system designed to overcharge those risks that the insurance company doesn’t want on its books, and to encourage the risks that it does, through calculating cheaper car insurance premiums.
Each and every car insurance company would have a ‘perfect risk’ profile, and anything that deviates from this is seen by car insurance companies as adverse selection, and would be charged accordingly on an increasing scale.
In order to get cheaper car insurance you need to understand your particular profile and determine which parts of it are incurring the most charges when you apply for car insurance. For example this could be because you own a ferrari, don’t own a garage, or are not an experienced driver.
When you’ve determined which ‘rating factors’ you have an adverse profile for, look around for specialist suppliers of car insurance that specialise in different adverse risk types and that have built up a large risk pool of people like yourself and can therefore offer much cheaper premiums. It may be that you could benefit with cheap cover from being a woman or older driver, or obtain specialist classic car insurance for your old MGB GT. Similarly young driver car insurance schemes present competitive premiums for those under 25.
Not only can specialist car insurance companies offer cheaper car insurance, but will also offer you the cover that your car and individual requirements need.
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