Pay-as-you-go Insurance: What are your thoughts?

[adri]

I have two bikes... try having two bikes at < 25 years old. Brutal! I can only ride one at a time, but I still get twice the bank-rape anyway. Jevco doesn't offer any discounts on multiple vehicles. If anyone wants to combine my rate so I'm only paying for one or the other that'd be awesome... but I'm not sure we need a mini-computer-thingy to do that, do we?

All in all I think one would be great for my secondary bike, as it only got around 2,000 km this year, and that was mostly in Hockley/Caledon/Hamilton/Collingwood/Wasaga and being a little scooter, no one ever "gunned it" and thank God no one had to slam on the brakes either. From the sounds of it the little device could save some money on this bike, but probably not on my primary one.

[VifferFun]

Thanks for the explanation. It still doesn't compute how insurance industry profits are calculated in hundreds of percents while the entire economy is in red. Also, those profits came from investing my money...

Yes, insurance companies do invest your money. Yes, some companies did very well last year; however, some companies did terrible. It is possible to do very well in a crappy economy if you can see it coming (which is the hard part). The companies who got lucky with their investment strategy did very well, while others did marginally well or very poor.

Here are some 2008 ROE figures on some of our favourite insurers who deal with motorcycles:

KEY: Return on Equity, $ Paid for Every Dollar Received

• Kingsway General: ROE: -30.79%, $1.38
• Jevco: -6.41%, $1.03
• State Farm: -5.09%, $1.23
• Echelon (Rider's Plus): 7.56%, $0.99
• Economical: -8.77%, $1.11

Some companies have fared very well with investments, or charging appropriate premiums for the risks (meaning they pay close to a dollar for every dollar received):

• Aviva: +15.10%, $1.02
• Co-operators: +5.49%, $1.06
• ING: 5.63%, $0.98

[Vlad]

Yes, insurance companies do invest your money. Yes, some companies did very well last year; however, some companies did terrible.

That's the problem. When they do poorly they raise my premium, but when they do good I don't get anything back. Duke&Duke from "Trading Places" always get their commission. This is basically just managing other people's money, not a brick and mortar business that produces new value. Thanks for the numbers, interesting read.

[VifferFun]

That's the problem. When they do poorly they raise my premium, but when they do good I don't get anything back. Duke&Duke from "Trading Places" always get their commission. This is basically just managing other people's money, not a brick and mortar business that produces new value. Thanks for the numbers, interesting read.

You're right . . . insurance is simply managing other people's money. The only purpose of insurance is to limit each client's exposure to loss. Not many people can afford to pay for their own medical costs or for a huge liability suit, but as a group they can afford to pay for the losses of the few. You pay +- $2000/yr with certainty so that you are never exposured to a $2M claim . . . or even an $18M claim as we just witnessed in Ontario. Your insurance policy is worth a lot of money, even though you can't see and touch it.

Insurance companies take a risk every year . . . it is like a strategic gamble with each policyholder. If the insurance industry were to return all of their profits to the clients in good years, yet absorb the losses in bad years, where would be the incentive to stay in business? The industry isn't a charity, and out goal is to turn a profit.

If positive claims experience becomes a trend, then future premiums (overall) will decrease. The industry is in talks with the Ontario government to implement some cost-saving measures so that we can decrease the AB premiums that you and I pay. AB claims in Ontario are out of hand, and we are well aware of that. Hopefully we can see some positive change soon.

You individual premium can also decrease if you become less of a risk to the insurer. If we think you are less likely to make a claim, then we don't need to charge you as much to turn a profit.

[eastcoast_gsx]

Insurance companies take a risk every year . . . it is like a strategic gamble with each policyholder. If the insurance industry were to return all of their profits to the clients in good years, yet absorb the losses in bad years, where would be the incentive to stay in business?

That almost makes me shed a tear...

The industry isn't a charity, and out goal is to turn a profit.

MANDATORY insurance (Public Liability) should be NON-PROFIT and run by the government.

In my wifes home country that is how it works, you can by Liability Insurance from the government for like 200-500 a year, and if you want anything above that you go to the private insurance companies. (or you can buy it all private if you wish)

[Vlad]

MANDATORY insurance (Public Liability) should be NON-PROFIT and run by the government.

Like he said . Bundle that with a cap on claims payouts and I think we have a winning combination. I know it's hard to put a dollar figure on human life and no amount of money can restore the lost quality of life for someone turned paraplegic, but we have to be more realistic and pragmatic. Anyone with a whiplash (real or simulated) and a good lawyer can win enormous amount of money from insurance.

There are plenty of examples for better and much cheaper insurance systems elsewhere in the world and even in Canada. Why is everyone putting up with this racket scheme in Ontario is beyond me. Insurance companies certainly do not have a problem with it...

[13lotusflowers]

Like he said . Bundle that with a cap on claims payouts and I think we have a winning combination. I know it's hard to put a dollar figure on human life and no amount of money can restore the lost quality of life for someone turned paraplegic, but we have to be more realistic and pragmatic. Anyone with a whiplash (real or simulated) and a good lawyer can win enormous amount of money from insurance.

There are plenty of examples for better and much cheaper insurance systems elsewhere in the world and even in Canada. Why is everyone putting up with this racket scheme in Ontario is beyond me. Insurance companies certainly do not have a problem with it...

Precisely!! I think that'd be best!

[VifferFun]

Like he said . Bundle that with a cap on claims payouts and I think we have a winning combination. I know it's hard to put a dollar figure on human life and no amount of money can restore the lost quality of life for someone turned paraplegic, but we have to be more realistic and pragmatic. Anyone with a whiplash (real or simulated) and a good lawyer can win enormous amount of money from insurance.

There are plenty of examples for better and much cheaper insurance systems elsewhere in the world and even in Canada. Why is everyone putting up with this racket scheme in Ontario is beyond me. Insurance companies certainly do not have a problem with it...

I can understand why you think this sounds like a sweet idea, and it can work. Such a system is already implemented in BC, Saskatcewan, Manitoba, and Quebec. However, just because the gov't is running the insurance, it doesn't mean it is cheaper. If you think insurance companies are inefficient, how inefficient do you think a gov't-run operation would be?

When people compare Ontario premiums with the government-run provinces, they fail to recognize the fact that these gov't-run provinces are very low risk to being with. In fact, I know that if my company were able to write the mandatory coverages in these provinces, we would be cheaper than the gov't rates for good risks. For the high-risk operators (such as DUI's or inexperienced drivers to name a couple), we would be much higher than the gov't rate, since we aren't in the business of losing money.

The main benefit of having the gov't-run mandatory insurance is that they also have the power to make the legislative changes to limit losses. If the insurance industry were able to do this on their own, premiums would be much MUCH lower right now. With the gov't were in charge, they would instantly realize that they can only bring premiums down by taking action to put limits on losses.

[Vlad]

[QUOTE=VifferFun;1061663]If you think insurance companies are inefficient, how inefficient do you think a gov't-run operation would be?

Insurance companies are very efficient - in maximizing their own profits. A non-profit insurance company more directly controlled by the public would take away one big conflict of interest and tendency to charge as much as they can while paying out as little as possible. Eliminate the profit factor and you can have a much leaner and more efficient organization.

The main benefit of having the gov't-run mandatory insurance is that they also have the power to make the legislative changes to limit losses. If the insurance industry were able to do this on their own, premiums would be much MUCH lower right now. With the gov't were in charge, they would instantly realize that they can only bring premiums down by taking action to put limits on losses.

This is probably true and makes sense. However, I don't see insurance companies doing anything to limit their losses except passing them on to consumers. It all boils down to the fact that for-profit business of this kind does not have the best interest of public at heart. Somewhat similar to private health care - healthy person is not a patient and does not bring revenue, therefore the incentive to keep the population as healthy as possible is pretty much gone.

[VifferFun]

Insurance companies are very efficient - in maximizing their own profits. A non-profit insurance company more directly controlled by the public would take away one big conflict of interest and tendency to charge as much as they can while paying out as little as possible. Eliminate the profit factor and you can have a much leaner and more efficient organization.

Please refer to my industry statistics. Insurance companies aim to pay out about $0.95 for every $1.00 of revenue. That leaves about a 5&#37; underwriting profit margin. The investment income made by insurers is not just invested premiums, but also capital that has been accumulated over the years. Take away all of the capital and the picture is less rosy for the insurers.

If the gov't were running the show, I can pretty much guarantee you that they would have a similar target in mind. Perhaps they would target paying out $1.00 for every $1.00 of income, but that is only a 5% difference. My thinking is that the gov't would be less efficient at running the business, and the gain to the customer of a profitless operation would be overcome by the inefficiencies of the gov't. The people who would benefit the most from the gov't-run system are those with terrible driving records, since they would be heavily subsidized by the good operators.

This is probably true and makes sense. However, I don't see insurance companies doing anything to limit their losses except passing them on to consumers. It all boils down to the fact that for-profit business of this kind does not have the best interest of public at heart. Somewhat similar to private health care - healthy person is not a patient and does not bring revenue, therefore the incentive to keep the population as healthy as possible is pretty much gone.

The insurance industry is deep in the process of lobbying the Ontario gov't right now. I believe the gov't is going to take action, but they have decided to delay talks until later in the Fall I think. The proposal is to reduce the payouts on the mandatory insurance policy so that this cost savings can be passed to the consumer. I know what you're thinking, but YES, it definitely would be passed to the consumer (and it would be forced by the regulators even if we didn't want to). The situation looks positive, and the insurance industry would like the gov't to take the time necessary to come up with a excellent solution, and not a typical gov't band-aid solution (which is usually coincident with elections).

The problem is that Ontarians want it all . . . they want to pay cheap insurance rates, but still be able to claim their lottery winnings in the event of a claim. As the insurance industry lobbies the gov't, so to are the health care practitioners and other groups who clearly have an interest. This is similar to the people who want to pay less taxes and receive more gov't services . . . you just can't have it all.

If I had my way, I would put some definitive caps on certain types of non-catastrophic injuries, and then allow the client the option to purchase increased limits if they feel it is important. This would allow the majority of policyholders to pay significantly less, while still allowing people the opportunity to win the lottery if they think its necessary in the event of the claim if they choose to pay for the coverage.

[Vlad]

...Take away all of the capital and the picture is less rosy for the insurers.

All that capital came from my pocket, so I should have a say on how it's used/spent. I understand your points and appreciate the detailed explanations, but I'm still puzzled at how almost everyone else but Ontario has found the way to have a ballanced insurance system.

I know what you're thinking, but YES, it definitely would be passed to the consumer (and it would be forced by the regulators even if we didn't want to). The situation looks positive, and the insurance industry would like the gov't to take the time necessary to come up with a excellent solution...

Good luck. I mean it.

If I had my way, I would put some definitive caps on certain types of non-catastrophic injuries, and then allow the client the option to purchase increased limits if they feel it is important.

You and me both. No one really thinks much of how much they'll receive as the insurance payout until something happens to them, and then they want as much as they can possibly get. The trick is to set reasonable limits and provide additional options. Mandatory insurance should be affordable to everyone but proven high risk customers.

[Avi Singh]

All that capital came from my pocket, so I should have a say on how it's used/spent.

Not really, by this same reasoning, if I buy your house and you turn a profit, do I get some say in what you do with the money? We all provide all businesses with their capital to some extent.

[shah]

Poll shows that over 65% are opposing this idea ..I'd rather pay whatever I have to pay than to be monitored by Big Brother..

[Vlad]

Not really, by this same reasoning, if I buy your house and you turn a profit, do I get some say in what you do with the money? We all provide all businesses with their capital to some extent.

Wrong analogy. Insurance companies are entrusted with and paid to manage and distribute other people's money. They don't buy or sell any goods and strictly speaking do not produce any new value.

My insurance policy is more akin to a mutual fund holding than to a house deed. It's an investment, not a sale/purchase agreement.

[Avi Singh]

Wrong analogy. Insurance companies are entrusted with and paid to manage and distribute other people's money. They don't buy or sell any goods and strictly speaking do not produce any new value.

My insurance policy is more akin to a mutual fund holding than to a house deed. It's an investment, not a sale/purchase agreement.

I disagree. An insurance policy is not an investment. It's a product. The product purchased is a contract in which there is a transfer of risk.

What the companies do with the profits is their business. No different than an investment firm. Surely CI Mutual funds, Fidelity, Trimark, RBC, BMO, TD, CIBC etc. will not do what I tell them to do, because some of their capital comes from me.

[Vlad]

I disagree. An insurance policy is not an investment. It's a product. The product purchased is a contract in which there is a transfer of risk.

Point taken. We can discuss semantics around differences between "contract" and "product" but we are already far away from the subject, which is IMO:

Why are we paying so much for insurance in this province and how do we go about aligning our system with arguably more advanced and more affordable ones? Limiting insurance payouts seems to be a solution everyone agrees on, what are the others?

What the companies do with the profits is their business. No different than an investment firm. Surely CI Mutual funds, Fidelity, Trimark, RBC, BMO, TD, CIBC etc. will not do what I tell them to do, because some of their capital comes from me.

Customers of investment firms have a say in how their money is managed. It's called "net redemptions" and it hurts. No such thing with insurance, unless you count robbing Peter to pay Paul by switching insurance companies. Stocking up your RRSP isn't mandatory, insurance is. On second thought, maybe we should make RRSP contributions mandatory and insurance optional, or blend the two? What about employment insurance and CPP contributions that are also mandatory?

[VifferFun]

All that capital came from my pocket, so I should have a say on how it's used/spent. I understand your points and appreciate the detailed explanations, but I'm still puzzled at how almost everyone else but Ontario has found the way to have a ballanced insurance system.

The capital is accumulated from years of doing business and investments. Every business has accumulates capital.

[VifferFun]

Why are we paying so much for insurance in this province and how do we go about aligning our system with arguably more advanced and more affordable ones? Limiting insurance payouts seems to be a solution everyone agrees on, what are the others?

Limited losses that are paid out by insurers is the only way for a real change. If the insurers have to pay out $x, then you can't expect them to receive $(x-y) in income.

The insurers themselves can also become even more efficient in tdaily operations, although I don't think it is that horrible to begin with. Even if the insurers improved their efficiencies drastically, it wouldn't improve premiums a whole lot . . . perhaps 5%. The expense ratio is usually around 27% for most insurers, which isn't even that much higher than The United Way, a charitable organization with volunteers, who boasts about their low expense ratio of only 19-20%.