Sunday, March 30, 2008

Deciphering Auto Insurance Rates

Of all the bills I receive, the biannual renewal of my auto insurance ranks as one of the most expensive and mystifying. It is usually worth my effort to call my insurance agent and review the numbers with her over the phone. I am usually several hundred dollars richer after the phone conversation for reasons that make no sense to me.

My auto insurance bill is made complex by the fact that we own two vehicles and have four drivers. Two of the drivers are teenagers with my son having a license and my daughter a learner’s permit. While these circumstances make for a complex bill with lots of additional charges and discounts going into the final computation, my situation is in no way unusual. I’m certain that I am one of millions of fathers with teenagers at home learning to drive. But the banality of my situation makes me wonder even more about the kind of logic insurance companies employ when setting rates.

For example, each of the four drivers in our household must be “rated” on one of our vehicles. We own two vehicles that are vastly different in value. Our “family” car, a 2005 Dodge Grand Caravan, has a book value of about $10,000; while the 1997 Geo Prizm with over 140,000 miles that I use to commute to work, is worth almost nothing. I am “rated” on the Prizm, but the rest of the family was “rated” on the Caravan.

“Can I drive a vehicle that I am not rated on?” I asked.

“Yes, you can drive either vehicle,” the agent replied.

“What about my kids? Can they drive the prism?”

“Yes they can drive either vehicle; they’ll be covered.”

“What does the rating mean then?”

“We need to rate each driver on one of the vehicles to determine the rate for insurance.”

Talk about a circular definition. I then asked what would happen if my teenage drivers were “rated” on the prism. After a silence while she entered the scenario into the fields on her computer screen, she came back with a figure that was about $500 less.

“Why the big difference?’

“Because you don’t have any collision coverage on the prism.”

“It has no book value so it wouldn’t be worth insuring for collision.”

She agreed and said that she would change the policy to rate my children on the prism. She assured me that each of us could drive either vehicle and we would be covered. There would be no practical consequences to the policy change; only the rate computation would differ. I hope she knows what she is doing. But, I imagine my policy would come with dire warnings if being rated on only one vehicle meant that you couldn’t drive the other.

I then asked why I didn’t see any mention of the “good student” discount on the policy even though I had faxed report cards several weeks earlier. She wasn’t sure what happened to the faxes and admitted that the discount had not been applied. She applied it and informed me of another $300 reduction.

By the time I was finished with the phone call about $800 had vanished from my six-month policy. Not a bad outcome for 20 minutes of my time. But it was a strange kind of price negotiation. The agent’s demeanor was that of a disinterested third party (which she essentially is) rather than an advocate for her company. The price for the product was determined by some arcane formula programmed into a remote computer. Manipulating the price while staying within the rules of the policy was easy if you took the time to ask the right questions. After all, the computer only responds to numerical inputs with numerical outputs; it doesn’t know what the numbers mean either.

You wonder if anyone at the insurance company knows what these numbers mean. But asking the right questions is saving me over $1600 this year.

Joseph Ganem is a physicist and author of The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy

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