Detour

As any car owner will tell you, the process of looking for, and purchasing, car insurance is like waiting for your credit card bill after a long night with an open tab and lots of friends mooching off your kindness.

In a former life I was a licensed property and casualty insurance agent in over 20 states, which helped pay my way through college. I worked for Geico Insurance (a subsidiary of Warren Buffet’s Berkshire Hathaway) and 21st Century Insurance (part of the AIG group) as a telephone insurance salesperson, mainly working nights and weekends. I just received my car insurance renewal offer and it reminded me that many people may not be aware of many of the industries quirks and thought I would write a post that Google will cache, and that may be helpful to souls searching for information clarity in a dense forest of confusion.

There are a few basic things you should know when your auto policy comes up for renewal.

Always shop your rate…always!

Here is a list of quotes I received for renewal of full coverage insurance on two 2005 cars.

(12 months rate) - (100/300 BI, 100 PD, 2 Med, 100 Ded Comp, 500 Ded Coll, UM 100/300, Rental and Towing)

With the exception of Esurance all companies are rated A+ Superior or better by AM Best, an indication of strong financial strength.

Wawanesa - $1241
Amica - $1515
Esurance – $1934
Liberty Mutual - $2076
Geico - $2500 (Double the best rate, with all of my information the same!)

A large portion of your auto insurance rate is dictated by your driving record, but not all of it, there are many other factors that have huge effects on the price you pay. Your rate can have little to do with you. There are things you can’t control such as your zip code (some areas have high rates of auto theft…so full coverage is more expensive there), your sex (males are generally more aggressive then females and tend to get in more accidents…on average), and age (younger drivers have less experience then older…very old drivers have similar problems). However there are things that affect your rate that have nothing to do with anything you did and that vary from company to company. Some examples are company aggressiveness, local claims history, politics, and timing can have tremendous effect on your rate, and a few phone calls can save you hundreds of dollars.

Company aggressiveness is defined by how badly an insurance company wants to gain market share in a certain area. If a company has just entered a state they need to gain a lot of business and will do so by charging lower prices to the consumer. Sometimes this can work against you. If a company has too many clients in an area (yes this is possible in the insurance industry….e-mail me if you want to know why) it will begin to be more selective about the new customers it allows in. A very useful tool for this limiting of new customers is higher insurance rates.

Claims history for the company can also dramatically increase/decrease the amount an insurance company will charge to its consumers. If a company has had a large number of at fault accidents in an area, they will want to recoup those costs by raising the price in that area. This can sometimes be the result of taking too many of the wrong customers at a rate that is too low. They solve this problem by increasing rates. The opposite also holds for companies that are experiencing below normal claims activity. They will lower their rates in these areas to pick up more of the areas profitable (low claims activity) consumers. Since this type of claims activity varies from company to company you can find large differences in the rates companies are charging for the same coverage in the same city.

Timing and politics is a third reason why policy rates can vary so widely from company to company. When I worked at Geico we would steal customers of State Farm whenever we got a phone call from them. This had nothing to do with a conscious decision by Geico or State Farm, politics and timing dictated the dramatic price differential. Claims costs had spiked in California and nearly every company doing business in the state had applied with the Insurance Commission to raise rates. At first, the Commission was approving the rate increases. State Farm was one of the first to get a rate increase approved. Geico was a bit late to apply, and by the time their application got to the commissioner’s desk there was a great outcry from many citizens about the ‘unfair’ rate increases and all future increases were halted. Geico was forced to stay at the old lower prices (which lost them money) while State Farm was able to charge the new higher market equilibrium price. The disparity in prices was great for the old State Farm customers switching to Geico and for me, since I sold more policies, but Geico would have preferred not to sell the policies at those lower rates. Timing and politics.

Another reason why rates can vary so widely from company to company is that insurance companies use asymmetrical methods to come up with your rate. They have studied the market and are always looking for ways to discriminate in the marketplace that have not been deemed illegal by governmental officials in the individual States. Some companies depend solely on age, driving record, and zip-code. Many others have found that certain groups have differing claims histories and try to very there rate accordingly. While it is illegal to base a rate on a protected class of people such as racial groups or sex (in some states), it turns out that you occupation can be a great way to discriminate against you. Geico is the king of this type of insurance discrimination…they are known as an occupational underwriter and have lots of data and experience to base your price on this variable. Accountants, Doctors, Lawyers, and Scientists get the best rates. While Garbage Collectors, Police (there are lots of reasons for this one) and unskilled laborers get the worst rate. Geico has found a correlation between your job (and to a smaller extent your level of education) and how many claims they will have to pay out to you. The price of a policy at Geico can be doubled based solely on your occupation.

Another very common way that insurers vary your rate is on your credit score. If you have a bad credit score you have a tendency to have a lot of claims as well; so you will get charged a higher rate. Good credit scores will earn you better insurance rates at many companies. If you have bad credit it is in your best interest not to give your social security number to an insurance agent until after you have been quoted a price. Insurance agents can run your credit without your permission, since it assumed to be common knowledge that insurer run credit reports for past insurance claims that have gone unpaid.

From now on, when you call for an insurance quote, do not assume any question is innocent. When they ask for your social security number they are doing it for a reason. When they ask your occupation…they are doing it for a reason. You should consider why they might find that answer interesting before just blurting out an answer.

For the above reasons it is always in your best interest to shop your auto insurance rate every time it is up for renewal. Find an aggressive company that rates on traits that you possess and remember that just because your company gave you a good rate last time doesn’t mean it is competitive this time. I hope this has helped.

In yesterdays Wall Street Journal (12/14/2005 Page A21) Holman W. Jenkins, Jr. writes a scathing op-ed about misconceptions of Toyota Prius owners. Anyone with half a brain and exposure to elementary school level math knows that the purchase of a Toyota Prius is not justifiable in purely economic terms. At over $9,000 above other conventional high mileage cars (such as Honda Civic or Toyota Corolla) a Prius owner would have to drive 66,500 miles a year or gas would have to rise above $10/gallon. Both scenarios are highly unlikely for the normal driver under normal circumstances. Mr. Jenkins expands his criticism to ideas the normal consumer would not normally consider…

Now, as an economic matter, overpaying for the privilege of saving gasoline is simply a subsidy to other gasoline consumers…

But doesn’t saving oil have benefits beyond the dollars saved — for instance, postponing the doom of civilization?

No: If Prius owners consume less, there’s less demand, prices will be lower and somebody else will step up to consume more than they would at the otherwise higher price. That’s the price mechanism at work. Oil is a fantastically useful commodity. Humans can be relied upon to consume all the oil they’d be willing to consume at a given price.

In short, Prius owners reduce their consumption of gas, this lowers the demand for gas, which (since gas is a normal good) decreases the price of gas. This means driving a Hummer has just become that much more affordable for the marginal consumer, ceteris paribus (All other things being equal).

Maybe you just want to have a clear conscious and clean up after yourself. I can respect that. In that case, go buy a Terrapass.

When you buy a TerraPass, you sponsor a guaranteed reduction in carbon dioxide emissions. They use the money to for projects such as:

• An entrepreneurial wind farmer receives funds to expand his plant.
• A small dairy farmer gets capital to install digesters on his farm to control methane emissions.

Using financial instruments such as carbon credits, your funds result in guaranteed reductions.

Terrablog (the blog found on the Terrapass website) justifies the purchase in a recent post by stating…

Nor is our goal to vilify the much-maligned S.U.V. driver, however much we might wish that fuel efficiency played a larger role in her purchase decision. A quick spin of our carbon calculator shows that a driver who clocks 40,000 miles a year in a hybrid Prius puts just as much CO2 in the air as someone who drives 12,000 miles in a Ford Explorer.

I input information for a 2005 Ford Explorer and a Toyota Prius and received the following data:

Your 2005 Ford Explorer 4WD automatic transmission
emits 13,812 lbs of CO2 per year.

Your 2005 Toyota Prius automatic transmission
emits 4,226 lbs of CO2 per year.

A Terrapass for the SUV is $79.95, while the Terrapass for the Prius was $29.95. The problem with this is that the price is not proportional to the emissions of CO2. The ratio of emission between the two cars is

4,226/13,812 = .30597.

The ratio of cost between the two cars is

29.95/79.95 = .37460

Pound for pound the Toyota Prius owner pays almost 7% more for there carbon emissions reduction then the Ford Explorer owner.

Under what assumptions can a Prius purchase be justified?

More on this subject can be found here, here, here, here, and here.

Update: Adam Stein at TerraPass wrote me to say…

You’re right that the price per carbon varies between our various purchase levels, although your math is slightly off. A purchase of an SUV TerraPass results in a guaranteed reduction of 20,000 lbs of CO2, regardless of whether you drive an Explorer or a Hummer. And the purchase of a Hybrid TerraPass results in a guaranteed reduction of 6,000 lbs of CO2, regardless of whether you drive a Prius or an Insight (or a Hummer). We provide the carbon calculator as a tool so people can estimate their own environmental impact, but the results of the calculator don’t change the purchase levels.

But even using these adjusted numbers, your basic result is still the same: Prius owners pay slightly more per ton of CO2. Why did we do this? Are we attempting to punish Prius owners?

Nope. The reasons are two-fold: first of all, there is a transaction cost associated with trading in carbon markets. This transaction cost doesn’t really change depending on what kind of car you drive, so it isn’t entirely valid to simply divide the price of the TerraPass by the number of tons of carbon remediated.

The second — and far more important — reason we set our purchase levels the way we did is that TerraPass is all about making it easy for consumers to clean up after their cars. If you reread the earlier part of my comment, it’s nerdy gobbledygook — not the type of stuff that makes your average driver want to dive into the carbon markets.

We strive to make it easy: four simple purchase levels at four standard price points. (Fact is, even this is rather complicated, but we didn’t feel we could get it any simpler.) We’re offering a basic value proposition that we hope consumers will respond to.

So, yes, one result is that the price per ton of CO2 fluctuates a bit between purchase levels. But in absolute terms the difference is only a few bucks — and hey, we don’t even make people pay for shipping!

This week G Richard Wagoner Jr., Chairman and CEO of General Motors, wrote an op-ed called “˜A Portrait of My Industry” attempting to address the root-causes of GM’s abysmal performance in the past few years. In essence, he is writing a defense for all three US auto-manufacturers. Mr. Wagoner writes…

GM has lost a lot of money in 2005, due to rapidly increasing health-care and raw-material costs, lower sales volumes and a weaker sales mix — essentially, we’ve sold fewer high-profit SUVs and more lower-profit cars. What is less clear is why things turned sour so fast for GM, as well as for other American auto makers and suppliers. To put it another way, why are so many foreign auto makers and suppliers doing well in the United States, while so many U.S.-based auto companies are not?

So far so good; maybe the top executives with the big three US auto manufacturers have their eyes wide open and are formulating a plan to take on this issue effectively and head-on. Chairman Wagoner continues…

Despite public perception, the answer is not that foreign auto makers are more productive or offer better-quality or more fuel-efficient vehicles. In this year’s Harbour Report, which measures manufacturing productivity, GM plants took three of the top five spots in North America, including first and second place.

Huh? Is he actually touting manufacturing productivity as a strength of GM? He can’t seriously be taking this line of argument! A look at the 2005 Harbour Report (No free-link available) reveals that Toyota is now the most efficient automotive manufacturer in North America. There is still a considerable gap between Detroit and the Japanese-owned “transplant” assembly lines, however. GM, which Harbour described as “the best of the Big Three,” required an average 34.33 hours of labor to produce a vehicle last year, compared with just 27.90 hours for Toyota.

It certainly doesn’t sound like GM has a competitive advantage in this area. It takes them nearly six hours longer per vehicle to produce their product. That’s 75% of a regular time shift on a production line. If that extra time was spent making the GM car a more attractive, safer, more economical, and/or a more reliable car than it would be time well spent. However, I don’t know a single person that thinks GM is better at any one of those things than the Japanese. The story gets worse.

One of the new study’s most illuminating figures had nothing to do with productivity. General Motors average revenue per vehicle was only $20,659 while Toyota was $26,514 per vehicle. Compounding matters, Japanese profits per vehicle were significantly higher than GM, with a per car profit of $1,433 at Toyota , $1,250 at Honda , and $1,603 for Nissan. Ford had the highest figure among the Big Three, at $620, while GM lost $2,311 per vehicle in 2004.

GM lost 2,311 per vehicle last year! I know I dropped out of my economics PhD program without earning a degree, but I am relatively sure that this is not a sustainable long-run strategy to increase shareholder wealth.

In the meantime Chairman Wagoner earned a salary of $2,200,000 and a BONUS of $2,460,000 last year. How do you get a bonus of any kind when you lead a for-profit organization into returns on investment like that?

Apparently Chairman Wagoner has his head in the sand. He doesn’t see any of the above as the main reason GM is doing so poorly. First he uses the reliable canard of health-care costs. Mr. Wagoner writes…

So what are the fundamental challenges facing American manufacturing? One is the spiraling cost of health care in the United States. Last year, GM spent $5.2 billion on health care for its U.S. employees, retirees and dependents — a staggering $1,525 for every car and truck we produced. And the figure is going up again this year. Foreign auto makers have just a fraction of these costs, because they have few, if any, U.S. retirees, and in their home countries their governments fund a much greater portion of employee and retiree health-care costs.

Don’t get me wrong, I love bashing American labor unions as much as the next guy, but no one held a gun to your head to sign the health coverage contracts with the union. Even a person with the most basic math skills can calculate that this is not one of the fundamental reasons for GM’s poor performance. GM loses $2,311 per vehicle. If we were able to waive a magic wand and eliminate all health-care costs from GM’s liability sheet, they would still be losing $786 per vehicle.

I imagine the magic wand GM has in mind is to socialize health-care. Does he actually think that if the government took over health care costs that the cost to GM would be less than it currently is? He wants the only organization more inefficient than his own to take over one of his biggest costs in hopes that marginal health care costs will go down! Ha, where was this guy educated? He must have fallen asleep in his economics classes as an undergraduate.

To illuminate this falsehood in another way; If GM sold its average car for the same price as Toyota (an addition of $5,855 per car) they would eliminate their marginal operating loss and make a profit of $3,544. This would more than cover the large executive bonuses and employee health-care liabilities.

Mr. Wagoner actually is magnanimous about GM’s health-care costs…

Some argue that we have no one but ourselves to blame for our disproportionately high health-care “legacy costs.” That kind of observation reminds me of the saying that no good deed going unpunished.

Let me give you a little advice Mr. Wagoner. If you want to do a good deed for your employees, shareholders, and society…operate a profitable car manufacturing company that fulfills promises made, and doesn’t make promises it can’t possibly keep. In short, do what you say you are going to do, and don’t lose sight that a for-profit organization benefits society best when it makes a profit. GM didn’t enter in these union contracts to do a good deed, they made a business decision that the costs was justifiable and possible to cover.
Mr. Wagoner continues his excuse making by blaming lawsuit abuse and unfair trading practices for GM’s woes. As if lawsuit abuse in America doesn’t effect Japanese companies producing vehicles in the US. It is laughable to think that

Japan’s long-term initiatives to artificially weaken the yen.

somehow makes Japanese domestically produced cars more productive than US domestically produced cars. With all due respect Chairman Wagoner, you need to get your head in the real world. Few domestic buyers would buy an American car at the same price as a similar Japanese car. American cars are not seen as attractive, as reliable, and as economical as the Japanese automobile. If you make a good looking car, with state of the-art technology (no that does not mean On-Star as Chairman Wagoner touted in his op-ed), at a reasonable price, that is reliable up to and over 100,000 miles…and do that year after year. The US auto industry will continue to be viable. This means that you have to constantly innovate. Chairman Wagoner was proud to say GM will be rolling out Hybrid cars in the next few years. He doesn’t realize that unveiling five year old technology that your competitor has had a major advantage in for years will not score you points in the consumers mind. Innovate, create new technologies before you competition, or you will be, at best, mediocre in your field. Innovate or die. Simple but true.

More On This Subject: More on this subject can be found here, here, here, here, here, here, here, and here.

Update: Thanks for noticing Prof. DeLong.

Welcome Real Clear Politics Readers!

Your’e the man Will!

Thanks for the link dada!