Optimal Car insurance

Following on in the current theme of 'Frugality', with articles such as 'How an investment of £30 has saved me £1044' here follows an article on saving money when buying car insurance:

Introduction: What is all this Insurance?

This article conveys to the reader a personal problem that I have with car insurance companies. Many people do not think long enough when they are paying out for car insurance. Aside from the fact that many do not use comparison websites, the ones that do tend to find the cheapest fully comprehensive insurance and be done with it. If this sounds like you at all I implore the reader to take not of the following article. The reader should gain an insight into how to optimize their choice of car insurance. For one thing the reader should learn the value of closer analysis into financial matters, appreciating that there are always more options available than the obvious few.

There is no doubt on the matter car insurance is incredibly expensive. I believe that given the choice many people would not opt for car insurance. Unfortunately however, it is a legal requirement.

I have a slightly alternative way of looking at buying car insurance...and hopefully it's a more money efficient method. I make a few assumptions:

1. When it comes to small bumps and scratches most people pay to fix their car themselves (and not allow insurance companies to get involved) as they reason that they will save more money in the long run by not losing their no claims bonus and not having their premiums put up.
2. Once a car is purchased it loses on average half its value as you drive it off the forecourt
3. I am assuming a UK car market and UK law but I assume that most economically developed nations have similar issues
4. Insurance companies exist to make money by having people pay them more than they ever have to pay out (simple business set-up....or not!)

Types of Insurance

1. Third Party: is a legal requirement ensuring compensation is paid when there is injury to another person or their property as a result of your driving. However, it doesn't cover costs incurred by you as the result of an accident (remember here that we have assumed that most people pay off most of the damages themselves, unless the costs are too great).
2. Third part fire and theft: provides the same cover as above but also insures against the risk of your car being damaged by fire or being stolen.
3. Comprehensive: provides the same cover as previous, however it covers you should your vehicle be damaged in an accident. Other additions may include: courtesy cars, insurance for excess and legal expenses, roadside recovery, and vehicle repairs

My situation

I shall now explain my current situation and how I hope to proceed. I hope that you will follow my logic and that it can be helpful to others out there:

After checking eBay and other comparison website, I was shocked to find that the current value of my car is about £1000 :-(

I decided to use a comparison website to see what the best deals for car insurance were for someone of my driving experience. I should note here that I am male and have been driving for about 5 years without any accident or claim.

I was shocked for a second time (need to stop checking these sites!) to find that to get fully comprehensive insurance it would cost me £1369.19 and that was the absolute cheapest provider. That's more than the current price of my car! If we didn't have to pay for insurance and my car was damaged, it would be cheaper for me to buy a new car of similar value (if not better quality) than to pay insurance and get the car fixed.

The cheapest third party only insurance was £1184.12.

The cheapest insurance that I could find for someone like me was £960.11 for third party fire and theft. Still a ridiculously high amount considering the worth of the car. Mathematically I think that there is only one optimal to the problem of which insurance to purchase.

Potentially Optimal Solution

The best solution that I can think of is that I buy the cheapest insurance possible regardless of whether or not this is the minimum required insurance.In this case I end up buying third party fire and theft. Observing assumption 1 it is clear that many of this 'extras' that fully comprehensive insurance would cover, many people purchase themselves out of fear of paying an excess or losing their no claims, so where was the benefit of paying the extra costs of fully comprehensive insurance.

For those that disagree with me (and you are entitled to in the comments box below) and argue that they would have claimed on their insurance for the small bumps and scratches I have a possible alternative for you. Why don't you put the excess money that you would have spent on the fully comprehensive insurance into a savings account. This can be your own personal "car kitty". In this case you would put £409.08 in it. This is the difference between the payment between fully comprehensive insurance and third party fire and theft.

Reasoning

Assumption 4 suggests that regardless of what you do the insurance company will find a way to make its money back. If you don't claim on your insurance you will have to pay out and the insurance company walks away with your coverage money without having to pay you a penny. If you do make a claim then you make lose your no claims bonus and have to pay an excess. Furthermore, the insurance company will probably put up the price of your insurance when you are up for renewal in an effort to reclaim their lost revenue. It's a rigged deck where the house never loses!

The solution I have presented to you makes sense. In any situation the insurance company wins, so why not mitigate your legally required losses by buying the minimum amount of insurance required. BUT we also take the sensible decision to build up a small pot of savings (the difference between the payment between fully comprehensive insurance and third party fire and theft) to help pay for any damages to your car, preventing us from claiming on insurance and bumping up your costs.

One important thing to note

Of course there is one key assumption in all this. That is that your car is not worth very much. Of course if you're driving a brand new expensive car the maths is a little different in which case purchasing fully comprehensive insurance may make sense as the insurance money you are paying is not worth more than the car itself (by the way, as an economist I am almost 100% certain that there is something wrong with a market whereby to insure an object of a value X you need to pay out X + Y!).

However, I hope that this article has made you realise that in buying insurance, it is not as simple as choosing fully comprehensive over third party. Instead it involves careful analysis to weigh up all the options.

Do any of you disagree with me? Please say so below and we'll debate it out. Let me know if you think I'm crazy!

Have any of you got any innovative methods for saving money?

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