The Survival Podcast Forum

Finance and Economics => The Money Board => Topic started by: ag2 on February 18, 2011, 12:10:30 AM

Title: Steal this idea - vehicle insurance company
Post by: ag2 on February 18, 2011, 12:10:30 AM
I purchased my 1989 Toyota Pickup (4 cyl EFI) for $10,000.  I have replaced the engine and kept up maintenance, thereby avoiding the need for a new vehicle.  It has about 237k miles on it.  The paint job is a bit faded, but runs like a dream.  This BOV is 90% stock and has done some pretty impressive four wheeling in the Rockies and Moab over the years. (Done bragging)

Here's what bugs the heck out of me.  Since 1997 to date, I have paid roughly $12,600 in full coverage (downgraded to liability only when it was paid off) vehicle insurance.  I shopped around every few years and had/have very competitive rates.  It doesn't make sense to me to pay so much in insurance.  I have never been in an accident.  I do not dispute the value of insurance and I understand why it is mandatory.  (The libertarian inside me despises this law, but the logic in me understands the risks.)  Yes, I know that what I have paid over the last 10 years would not even cover a $35,000 vehicle that I could have totaled in a negligent moment, so my insurance is worthwhile protection.

Nevertheless, when I think about the roughly $12,600 I have paid to my insurance company, I get a little sick to my stomach.  To me, all that money is gone and I have nothing to show for it.  I wish vehicle insurance could be structured more like modified whole life (rather than term) insurance.  I will do my best to explain and others can chime in more eloquently, or shoot down my idea.

What if, there was an insurance company that charged regular vehicle insurance rates until your account grew to a certain amount (say, enough to replace your car?)  A certain percentage of each monthly premium (hopefully at least 50%) would go toward your account and the rest toward the insurance company for medical and other driver coverage and company overhead.  Once the money in your account has reached a certain level, your monthly premium rate would drop.  Monthly payments would be reduced because contributions only need to cover the ongoing medical coverage and other driver coverage.  Rates would remain low as long as your account has enough money to replace your vehicle.  Your account would be like a savings account to replace/fix your vehicle. If you have an accident, money is taken from your account to replace/fix your vehicle in the accident.  Your rates would then go up until the account is replenished to the appropriate level.  You would be the one to determine this level (most likely subject to state laws' minimums). There is a clear incentive to avoid accidents.
If you get into an accident before your account has grown to the coverage level needed to replace your vehicle, then the percentage of your premiums going into your vehicle coverage account would drop and your account would grow more slowly for a period of time.  The insurance company needs to recoup the loss they incurred to cover your vehicle, but will still put some smaller percentage of your monthly premium into your vehicle coverage account.  This holds you personally responsible (to a degree) for covering losses, but still provides an incentive to keep you as a customer.

The money in the "vehicle coverage account" remains yours.  When you are too old to drive or no longer carry a license or vehicle insurance because you have orders to winter over in Antarctica, the money in your account,  (which is for vehicle coverage, not medical or other driver coverage) is given back to you.  If you die, this money would go to your beneficiary.

I don't see a need for brick and mortar structures to support this model.

Does anything like this exist?  If not, could one of you on the board start an insurance company like this in my state?  Did I explain it clearly?  Would this model meet most state requirements?
Does anyone here have the funds or interest to run with this idea?
Title: Re: Steal this idea - vehicle insurance company
Post by: Medicineball on February 18, 2011, 05:38:34 AM
As someone with experience in the insurance industry, I can respond to this. Ag2 has a good idea here, but there is a problem. The money you pay in premiums is not available to be saved for you, because it is paid out in claims to other people. That's what insurance does; it shares costs over a large number of people. There is a small amount of "unused" money left (otherwise known as profit) but the company's owners will want that because they need to make some money too. You could create an insurance co-op to do this, but the balance of your account would accumulate so slowly that I don't think people would be interested. You could raise rates to allow people to "save" faster, but then it would essentially be a savings account. One other thing: most of your insurance money doesn't go toward covering the car - it goes toward covering you. So that amount has no relationship to what a new car costs. Don't mean to shoot your idea down - keep working on it!
Title: Re: Steal this idea - vehicle insurance company
Post by: ag2 on February 18, 2011, 09:30:48 AM
Thanks Medicine Ball.  I was hoping to get replies from folks in the industry.  I understand that most of the premiums are used to cover "you" and not the vehicle.  The way I see it, my premiums are distributed toward other peoples claims and medical costs are probably the largest portion.  But if a small (maybe 5, 10 or 15%) percentage of my monthly premiums when into an account that I felt was mine, I think it would attract people and offer something in return.

To prove my point, look at all the credit cards that offer "cash back" at only 1% or 2%.  Those incentives work to attract customers.

I think if this insurance company was properly structured; and perhaps had relatively high standards for it's customers so that it only covered very responsible drivers, it might have a chance to be successful.

Here's a question for anyone.  If I already have very good medical coverage with my employer, why do I need medical coverage with my vehicle insurance?  I have been told that in my state (CO), your vehicle insurance covers you and my vehicle insurance covers me.  A person's vehicle insurance does not cover the other person.  Am I missing something, or am I needlessly paying for medical coverage (in an accident) twice since I already have medical coverage through my employer?