Wednesday, 25 January 2012

Car insurance: Discount or regular insurance

In my previous post on getting a great deal on car insurance I mentioned that I only considered the regular / full price (or expensive) car insurance and did not really consider discount car insurance due to the peace of mind that comes with a large reputable insurer.

However, on later reflection, and as I posted more about the benefits of a discount broker (Interactive Brokers) I thought I would investigate to see whether a discount car insurer could offer the same value as a discount broker. I accepted the fact that for the lower price you don't get all the frills however I set out to see whether it was worth it. A couple of background facts about my situation: I own my own car, I have no loan on it, I live in a suburb which attracts a relatively high car insurance premium and I have never had an 'at fault' claim in ~8 years of driving.

The full service insurers were offering me insurance premiums ranging from $1,100 to $3,000. The discount insurers were significantly cheap and for the same level of cover were offering premiums of between $600 - $800. There were several traps however:

  • Some insurers (such as Bingle) make you pay the excess whenever you claim (and not only when you are at fault. This means that you're paying the ~$700 premium and even if you do nothing wrong you have to fork out an extra $400 - $600

  • Other insurers are new and trying to gain market share (e.g. Progressive Direct, a subsidiary of US insurer Progressive, is offering really cheap rates in order to gain market share in Australia). Their PDS looks great and they look like they are offering the same service as the big insurers for a much lower price. Ordinarily this is exactly what I'd be looking for.

The reason I didn't go with Progressive Direct is that I have no idea what they are like when you claim. With most insurers all you need to do is google for product reviews and you get a general idea what they are like on claims. Some have relatively good reputations (e.g. GIO, AAMI) and others tend to get ripped to shreds by consumers (e.g. Bingle). You do not get the ability to look up what a new insurer is like and so are taking a risk that they will not pay out which makes your insurance premium meaningless.

The reason I ended up sticking with the full service insurer is peace of mind. The more I looked into it the more I realised the comparison with discount brokers was not warranted. With a discount broker you are getting the discount for your own research and financial savvy. With a discount insurer you are paying less because you take on the risk that they will refuse to pay out for an unexpected / unforeseen reason or that they stick you with costs you do not expect. In the insurance case you have no control over the company's policies and whether they will pay out so what you are paying for with a full service broker is a reputation for fair dealing.

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