Are market forces more powerful than regulators?
Published:Sunday | February 19, 2012 | 12:00 AM
Question: I am puzzled at the many ways that motor insurers come up with to separate us from our money. This one seems to take the cake. And it seems that valuators are on their side. I bought a second-hand Toyota Corolla in 2008 for J$970,000. The premium was J$32,729. In 2012, the car was valued for J$930,000. The insurance premium is J$57,000. During the period, I have had no accidents. I am earning the maximum no claims discount of 60 per cent.
I learnt two things in trying to get an explanation. First, that the lower the estimate of value, the higher the premium. The second is that if the car had been valued at J$1 million, the premium would have been J$39,000 or nearly one-third lower.
I had been wrestling over the years with the fact that I pay a smaller premium for my BMW, which is valued at almost twice the Toyota. This year's 40 per cent jump in premium for a lower value shocked me. Should there not be a floor that guarantees that even if the rate is higher at the lower value, the premium cannot exceed what it would have been at the higher value for the same car? Is there no regulatory body to which one can appeal against this blatant abuse?
HELPLINE:
Many things crossed my mind after I read your email. One was a letter to the editor of this newspaper that was written by a bank customer. The letter - which was published last Thursday - claimed that a leading bank was "silently imposing changes" on one of its advertised products. The product: a new swipe card. The gravamen of the customer's complaint was, to use our local idiom: the bank was 'selling puss inna bag'.
The writer, like you, argued that the bank regulator could stop the practice by way of "strong regulations".
An article that I read last week in The New York Times was the second thing that entered my thoughts. The headline was intriguing: 'Car policy for less, but only if you call'.
The story was about an Arizona retiree. He owns a 2002 GMC Envoy and a 2010 Toyota Prius. He was paying US$2,537 (about J$220,000) a year for insurance. After dilly-dallying around for a few weeks, he decided to call another insurer in an effort to save money. Much to his surprise, he found another company that would insure the same vehicles for US$1,267 - a reduction of 50 per cent.
When he told his existing insurers what the other insurer quoted, they advised him that they "had revised their underwriting standards and that he would now qualify for a premium of US$1,207".
That amount was nearly 53 per cent less than the premium they had originally told him. When he quizzed his existing insurers why they had neglected to tell him
about the change in their underwriting standards, a manager told him "the premium reduction would not have been brought to his attention unless he had asked for it".
The retiree was a loyal customer of the same insurer for nearly 40 years. During that time, he had only a few broken glass claims. His house was also insured with the same company.
What is the morale of these two cases in the context of the question that you posed? Banking and insurance company regulators have many fish to fry. They are, therefore, unlikely to take action to turn the screws on banks and insurers except in a few rare instances. Interventions will only occur where there are brazen violations of laws and regulations. Customers of these entities are expected to use market forces - competition - and information to protect themselves against abuse, neglect and poor service.
They will not say this to you directly, but their actions point in this direction.
The letter writer did something else in addition to complaining to the editor. He shopped around for a better deal than the bank was offering. This was exactly what the retiree in Arizona did after remaining with his insurer for nearly four decades.
The nearly 40 per cent jump in your premium this year has to do more with the general increase in motor premiums than anything else. Two articles were published in this newspaper on February 5 and 12 that I believe confirm this point.
The first is about a decision by life and general insurance companies to raise prices that "were impacted by reduced investment earnings and reinsurance costs".
The second dealt with the imposition of high premiums by insurers for high-theft model motor vehicles. Toyota Corollas were listed as being in the high-theft group.
The bottom line: shopping around is likely to be more productive in the present scenario than waiting for the regulator to act.
Cedric E. Stephens provides independent information and free advice about the management of risks and insurance. aegis@cwjamaica.com. SMS/text message to 812-7233.