Personal Finance Tips

Do you remember the Blues Brothers? They were unstoppable. They were “on a mission from God”. Seems like almost everyone standing behind the counter in the rental agency is a Blues Brother when you come into collect the vehicle. They always want to sell you something, usually additional insurance. The most common special offer is loss damage waiver (LDW). It sounds such a good idea to have complete cover against any loss caused to the vehicle while under your control. The magic word is “waiver”. You are excluded from liability even if you drive the vehicle off the end of a pier and it sinks without trace (hopefully without you still inside it). The only problem is this good idea can seriously damage your bank balance when the final bill comes in. That hourly or daily rate just got heavy. So when should you add LDW? The answer is deceptively simple. If you do not own another vehicle and have no insurance cover in place, it may be a good buy. But most insurance policies on your own vehicle cover you while driving a rental. So it all comes down to the extent of that cover on your own vehicle.

To get the maximum discount in these hard economic times, most people have been pushing up the deductibles. In many cases, the potential losses can be managed to keep to the low end. It’s your vehicle. You can talk to the repair shop and get all the work you want done at the best price. But when it’s a rental vehicle, everything is out of your hands. The rental company has no interest in protecting your bank balance. It pays top dollar to get the vehicle repaired and sends you the bill. No searching around to find the cheapest replacement parts and lowest price body shops. Everything is top of the range and then comes the kicker. It’s called the “loss of use” charge. You are expected to cover their estimated loss of profit while the vehicle is off the road. And guess what. If you are paying their loss of profit, they have no incentive to rush the repairs. They can take their own sweet time and, in most cases, you pay – most private policies do not cover loss of use charges. Some credit card companies offer limited cover, but read the small print before relying on it. Limited cover means very little actual money will ever be paid out.

If you are only renting for a few days, it’s probably worth paying for LDW. It may not be cheap car insurance, but it protects you. But if the end bill is going to be too high, trust to luck and your own insurance policy. Hopefully, your own cheap car insurance policy will give you enough of a buffer against claims Remembering, of course, that only the best private policies cover you against the dreaded loss of use charges. If nothing else, all this bad news should give you the incentive to drive like your wheels are passing over egg shells. Drive as safely and carefully as possible. If you are going to break some eggs, make sure the damage is minor and the losses are small.

The business of insurance is called underwriting. The company enters into a contract (called a policy) and agrees to indemnify a group of people like you against defined losses. So it uses some heavy duty math to work out the probability of the losses being incurred. It’s called risk assessment and relies on a complicated use of statistics. For vehicle insurance, the companies collect the details from every reported traffic accident in the US looking at the age, sex and occupation of the driver, the make and model being driven, the time of day, the road conditions, and the extent of the damage. The insurers share the information on the current costs of replacement parts and the labor to fit them.

They also manage to talk the health insurance companies into sharing their current costs on medical treatment for those injured in traffic accidents. With all this information, they can make good estimates of the cost of loss, i.e. the total amount they may have to pay out if they insure, say, 100,000 drivers. They take this estimate, add the cost of running the insurance company and a profit margin. This total is then divided between all the 100,000 as their premiums. Some companies divide the total equally so the good drivers subsidize the bad. But the majority adjusts the individual amounts based on the driver’s safety record. That way, each policy holder pays more or less depending on how well he or she drives. This is more fair.

But, to cut costs, some insurance companies make more general assumptions about the likelihood of losses. Instead of personalising the risk assessment, they focus the assessment on generalities. The most common is the use of the zip code. In some areas of a town or city, there are higher levels of vehicle theft and vandalism. Some areas have more people driving while intoxicated or impaired through drugs. Because of the design of the local road system, there may also be a higher number of accidents. The insurers therefore charge everyone living in those areas a higher premium. Apart from the unfairness at an individual level, some lawyers believe it is active discrimination because many of the zip code areas loaded with higher premiums have higher concentrations of particular racial or ethnic groups. California has formally prohibited insurance companies from using zip codes, credit scores and other factors not directly relevant to the assessment of driver safety. In those states, insurers continue to trade and make a profit. It has not been the end of the world they predicted.

So, depending on the US state in which you live, your premium may either be calculated based on your personal driving record, or it may be based on your zip code and credit score. Either way, the task of finding the cheapest car insurance remains the same. You have to shop around the companies licensed to sell policies in your state and find the best deal. If there is active competition between the insurers, the premiums will be lower and you will find cheap car insurance without too much difficulty. But if the state is unregulated and insurers do not compete, it will be more difficult to find a cheap policy.