Information Arbitrage and Car Insurance

I wasn't satisfied with my last post about car insurance rates and people's ability to get a lower rate on their own initiative, so I went back for more data. It turns out the insurance regulator, the Financial Services Commission of Ontario, has a tool for getting a lot more policy cost data than I could originally.

The "Understanding Rates / An Interactive Tool" is certainly interactive, though it is still a challenge to help understand rates. One problem is the shear number of insurance options. The tool exposes 11 additional policy options beyond the basic profile. Things likeĀ "extending housekeeping attendant coverage for non-catastrophic injuries for up to $100 per week". You can see the full list of extra options on the tools page.

Adding the attendant coverage to non-catastrophic injuries will bump rates by 2% to 18% depending on the insurance company. I'm going to bet there are lots of people who signed their car insurance policy with this option on - even though they have a spouse, or other family member, who could do these services for them in a pinch. An 18% jump in premiums is a lot of money for not much gain, in a pinch.

Add all 11 options together and and you get the following chart, showing the base insurance rate in blue, the "full meal deal" rate in red, and the percent increase between the two in yellow.

I should mention that adding all the incremental costs for each option together may not be valid. It's possible that each company may charge less for "bundles", but there is not time enough on the planet for me to query the tool that many times and pull out the combination data. So, for sake of argument, this will have to do.

What does this chart tell us? It tells us that extra, possibly useless, insurance options can cost you a lot.

If you take the full meal-deal insurance option and go with CAA or Portage-la-Prairie, you're rates will go up by 150%! If you happen to go with Chartis Insurance, the full-meal deal costs only an extra 25%.

The most significant take away though, is:

What if you're with CAA today, and switch to Chartis tomorrow? Well, your rates will go from $2,223 down to $1,432 - a drop of 35%. And you didn't even change your coverage! Drop all the extra coverage - that perhaps you don't need or are willing to live without - and you're down again to $1,158. In the end you're now 50% off from where you started.

Why doesn't everyone do this then?

Part of the problem with in car insurance in Ontario is "information arbitrage". The insurance companies know everything about us, but it's very and time consuming for consumers to understand car insurance rates.

So your best bet is to just call another company and say you want to switch. Especially if you're currently with CAA.

Insurance companies might have an information advantage, but consumers have a dollars advantage. Don't part with them until you've pushed for the best rate. And be careful of pressure sales tactics that encourage you to sign up for the full-meal deal.

That could be a costly mistake.