I sure as hell don't. I thought I knew the basics—pay a regular premium to your insurance company and when something bad happens, they pay to fix it. What could be simpler? But how do the insurance companies decide what premium to charge? There must be a formula—actuarial tables built on algorithms time-tested and market approved. You'd think so. But get this: I recently changed my auto insurance, bought the same amount of coverage, and saved $1,692 a year. I kid you not—$1,692! The cost of my new six-month premium costs just a bit more than what my MONTHLY bill was with my old company. Either my new company is taking a tremendous hit on me, or I was being robbed.
I take some measure of responsibility. When I first started paying high insurance rates, I didn't question it. I had just traded in my ten-year-old rust bucket for my first brand-new car, a 2004 VW Golf, and figured my rates would be going up anyway. Not only that, within two weeks of driving my new car off the lot, I crashed into the rear-end of an SUV. The SUV's bumper needed snapping back into place; my entire front end was crumpled up to my windshield. If you've never done something this stupid, you might not appreciate how humbling it is to stand on the side of the road beside a destroyed hunk of metal for which one owes five figures. So thank god for insurance, right? They were very nice about the whole thing. After my $500 deductible, they paid for the car to get restored like new, and it cost them about half the value of the car. I felt indebted to them. And boy, was I ever, to the tune of $2,200 a year.
But fast-forward nearly five years. I haven't had any other accidents (knock on wood), traffic violations, or black marks against me, and I've paid my bills with reasonable promptness. Indeed, I've now paid that insurance company more than they paid me for my accident. But my rates remained the same. Until one day last month, when they sent me a nice letter informing me that they had been undercharging me. "Have no fear," they generously told me (I'm paraphrasing). "We won't back-charge for our own mistake. That would be unethical. We just wanted to let you know that from now on, you'll be paying the 'correct' rate."
Call me ungrateful, but this letter got me wondering how they calculated their correct rate in the first place. I decided to see how a different company would calculate it. And the very first company that gave me an estimate—even taking into account my 4 1/2-year-old accident—offered me a policy at a clean quarter of what I had been paying. Twenty-five percent! 75% off! What gives? How can they afford that? Or: how can my original company get away with robbing me?
Before I made the final switch, I called my insurance agent and told my story. Don't worry, I was very polite. Out of some residual brand loyalty, I had decided that I might be convinced to stay with my original insurance if they could somehow do right by me, even meet me halfway. "I'm sincerely curious," I said. "Why have my rates been this high?"
"Can I call you back?" my insurance agent asked.
She never called back. I cancelled my policy.
It's not the company. Several friends and relations have told me their version the same story, only with the companies reversed. Perhaps in ten years my now-new insurance will be through the roof, and I'll revert back to the old, which will be offering me a sweet discount. Or maybe by then we'll have high-speed rail and I won't have to own a car at all.
Look, I understand that a great deal of what makes capitalism run is the ability of business to set prices that the market will bear; i.e., that suckers like me will pay through our noses because we don't know any better. Certainly the flip side of that is that when we suckers get wise, we can take our business elsewhere. That's called competition. But still, it amazes me that value can be so arbitrary.
I had essentially the same experience lately. Now paying 50% less than with the company I'd been with for 24 years... and during that time, they'd replaced one windshield and paid for one deer-dent. You'd think they'd have wanted to keep me for a customer; apparently not.
Posted by: turboglacier | June 01, 2009 at 10:01 PM