Monthly car insurance

Car insurance premiums gets higher and higher, as car insurance company profits get lower and lower! Something is completely out of balance here, so what has happened?

Insurance companies are being squeezed. It does not help one jot that the traditional method of selling insurance via networks of brokers has foundered against the rocks of the internet; clients who once upon a time had to trust their broker to negotiate the best deal for them now just go on to the web, find a comparison site and search themselves. Since they are not paying themselves any commission, their searches are completely unbiased so companies have had to compete really hard in order to hold onto the business they have boarding got, let alone increase it. The Internet has much to answer for!

We have to add to that the popularity of insurance fraud. This is a strange aspect of the human mindset; people who would never dream of stealing a newspaper from their local newsagent (or even one hundreds of miles from home!) Seem to have no compunction whatsoever about inventing a whiplash injury, or over exaggerating the damage to their cars or other property. In addition to this, and perhaps more sinisterly, organised gangs have been deliberately causing accidents in order to make insurance claims. Add to this hysteria about the magic word 'compensation' and we have a formula for ever rocketing premiums.

The effect of this has been to practically price young drivers off the insurance market, and is probably responsible for a major percentage of the large numbers of people who drive without insurance. Of those who remain within the law, many young drivers are now having to make monthly car insurance payments (see here for more information), because they simply cannot afford to pay their premiums are at once.

Accepting monthly payments has been something of a traumatic experience for insurers; if taken to an extreme, and we all paid in this way, the system would simply not survive as insurance companies would rapidly run out of liquidity. They are caught between a rock and a hard place; if they offer monthly payments they risk their capital base degrading, and if they do not accept them they lose a high proportion of their customers. Insurance companies are obliged to keep a certain amount of liquidity, so taking on too many monthly paying clients could put them in breach of their obligations.

From the point of view of the clients; it is very doubtful if many, indeed any, are terribly happy about having to pay monthly, particularly since it invariably costs them more; insurers have to make a profit and they make far more money from a premium if it is paid in advance, rather than if it is paid monthly, over 12 months. It will be interesting to see how many people agree to make monthly payments and then fail to complete their obligations; if the number of defaulters is high the days of monthly car insurance may come to an end sooner than we think.



Copyright John Lavin 2010