Let's say I offered you a special kind of car insurance. Assume that your 6-month premium on your car insurance was $600 ($100 per month).
The car insurance I have to offer is more expensive: $900 for 6 months--But if you don't get into an accident that's your fault, after one year, the car insurance company will give you $1000 back ($500 for each 6 months), making your "real" car insurance cost more like $400 for six months ($900-$500= $400). So you'll save 33%!
Don't ask why the car insurance company would do this, just assume they would.
Would you switch to this kind of car insurance?
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If I understand you, the payments every six months for the first 2 years, assuming no accident, would be: $900, $900, $400, $400 ... or $400 per half year + a $1000 startup cost (similar to gym membership) payable in two payments. An accident would be essentially a $1000 penalty that year, on top of the monthly payments.
Am I correct? What about deductibles?
It would take 4 years before this type of insurance became cheaper than the $100/mth version. I'm also assuming if I was to change insurance companies you'd keep the extra $1000 float?
I don't see the benefit to me here - so no.
Oh, there would definitely be some who went for that. How many people sign contracts and accept offers without reading the fine print or doing the math? That would be a big hit. "The company that rewards you for safe driving."
The payments this person would make, assuming no accidents would be as follows:1st 6 months: $9002nd 6 months: $900Refund end of first year: -$1,0003rd 6 months: $9004th 6 months: $900Refund end of second year: -$1,000.. and every time you you got into an accident which you were at fault in,you would lose the $1,000 refund. In addition, there would be NO deductibles.As I said, if you don't get into an accident, you save 33%! You are letting the insurance company borrow some of your money for a year.Would you buy it?
I am missing something.
It seems like your numbers are plucked out of the air. Why not offer car insurance that is $900 for six months but, if you remain accident-free, you get $800 back. You save a lot more that way.
I guess my question is why is the "Special Car Insurance Account" you propose economically viable for the insurance company? (I know you told me not to ask why the insurance company would do this, but isn't that THE issue?) Don't the deductibles serve the same purpose as a disincentive to cause an accident?
I am in the insurance business. The problem with the concept is it runs afoul of the primary principle of insurance, "The law of large numbers". Companies must collect premium from each insured as they do not know which insured will have the claim. If you were to refund premiums to the accident free drivers, then the costs assessed to the remaining 'claim' drivers would need to be alot higher than the few hundred dollars which you are recommending. The effect would be to make the upfront costs of insurance unattainable to most people.
I work for an insurance company as well. There is nothing about the law of large numbers that would make this not viable. This concept would work partly because it provides a very strong incentive for people not to file a claim (the $1,000 bonus), very much like a deductible but better. In addition, the insurance company can make investment income on the extra money it has. There is also an additional most important reason that would make this type of product work very well actuarially, which I do not feel comfortable discosing. Nevertheless, my worry is not with an insurance company being unable to make a profit. My only worry is people not willing to buy this type of product. So assuming they would offer it, would you buy it?