Hey there. Did you know that it’s Car Care Month?
Cars cost a lot of money, and the personal finance blogosphere has a whole lot to say on the subject of cars, that’s for sure. Let’s ignore the cost of cars, themselves, okay?
Do you know anyone that makes you pause, just for a moment, and question whether you should be a passenger in their car? The kind of person who seems to have lucky horseshoes, but their driving habits really don’t warrant a mostly-blemish-free record?
You probably do.
This person is literally an accident waiting to happen.
Unfortunately for you, that friend is the reason your car insurance costs so much.
Insurance companies face a problem called unobservability. They have to figure out how much to charge you for insurance, but they can’t see how you drive. They don’t know if you’re an accident waiting to happen, or have the smush-dodging reflexes of a house fly.
Traditionally, the way car insurance companies figure out how much to charge you is to group you together with other people with similar characteristics, using actuarial science. That’s why you see young men’s insurance rates topping the charts, they’re grouped by risk based on observable characteristics.
The same goes for speeding tickets, years driving, type of vehicle (people with sports cars tend to drive them like sports cars, and some cars are stolen all the time), and even school grades. I had some friends in Ontario who had to take their high school grades in to their insurance company in order to get a discount for A’s!
When you get older, you can’t exactly hand in your high school grades. You probably get all sorts of insurance offers from your post-secondary institution, or other groups to which you belong. That’s because it’s another way for insurance companies to group people by risk. Insurance companies want as many low-risk customers as possible, and fewer high-risk customers.
Giving you a discount for being in a lower-risk group is way for them to attract you.
Unfortunately most observable characteristics are lagging indicators, aka they only say what’s happened, not what could happen. Like your friend that is an accident waiting to happen, until that accident happens, they might look just fine on paper. Plus, most observable things are well removed from the day to day.
So what is an insurance company to do?
The latest trend is to observe people’s driving habits directly, and refund people with good habits, and those who do not drive as often or as far as others. This Atlantic article talks about the benefits of letting Big Brother into your car with a recording device.
Creepy? Maybe. But it has financial implications that could be good (or bad!) for you.
I haven’t heard of any big-brother attachments in the Canadian car insurance industry yet, so we are left with doing our best to signal to insurance companies that we are low risk. Not many of us are up for changing our sex marker, and definitely no one’s going to do that for a car insurance rate change, so focus on higher education, no speeding tickets and no accidents!
Oh, and of course, make sure you shop around for your car insurance. If you save $50 and it takes you an hour, that’s an hour well spent for most folks. If you are in Australia, take a look at Youi Insurance to see if they have what you need.
And please, keep your accident-waiting-to-happen friends safe. After all, that friend is why your car insurance costs so much (and mine too!).
Unrelated Pro Tip #1: The car insurance stickers in BC are really sticky. They are also designed so that they can’t be peeled off in one piece, so that no one can simply steal a sticker from someone else. Do not put them on in the wrong spot, or you will have a drunk-looking sticker for an entire year. Ask me how I know this.
Do you have any crazy stories about your friend?