Many Americans rely on their automobiles to get to work. No automobile means no job, no rent or mortgage money, no food. A single parent, struggling to pay the bills in the suburbs with 100, 000 miles on the odometer, would presumably welcome the guaranteed chance of low-priced insurance that would take care of every possible repair on her auto prior to the day that it reaches 200, 000 miles or falls apart, whichever comes first. Especially when the insurance is valid regardless of whether she even changes the oil in the interim.
So just why aren’t the car insurance companies writing such coverage, either directly or through used auto dealers? And given benefit of reliable transportation, why isn’t the public demanding such coverage? The answer is that both auto insurers and the life insurance public know that such insurance are not written for a premium the insured can afford, while still allowing the insurers to stay solvent and gain profits. As a society, we without effort understand that the costs associated with taking care of every mechanical need of an old automobile, particularly in the absence of regular maintenance, aren’t insurable. Yet we don’t appear to have these same intuitions with respect to health insurance.
If we pull the emotions out of health insurance, which is granted hard to do even for this author, and look at health insurance from the economic perspective, there are several information from car insurance that can illumine the design, risk selection, and rating of health insurance.
Car insurance comes in two forms: the traditional insurance you get from your agent or direct from an insurance company, and warranty specifics that are purchased from auto manufacturers and dealers. Both are risk transfer and sharing devices and I’ll generically refer to both as insurance. Because auto third-party liability insurance has no equivalent in health insurance, for traditional car insurance, I’ll examine only impact and comprehensive insurance — insurance within the vehicle — and not third-party liability insurance.
Bumper to Bumper
Bad maintenance voids certain insurance. If an automobile owner never changes the oil, the auto’s power train warranty is void. In fact, not only does the oil need to be changed, the change needs to be performed by a certified auto mechanic and documented. Impact insurance doesn’t cover cars purposefully driven over a steep ledge.
The best insurance emerges for new models. Bumper-to-bumper warranty specifics can be obtained only on new cars. As they roll off the assembly line, automobiles have a low and relatively consistent risk profile, satisfying the actuarial test for insurance pricing. Furthermore, auto manufacturers usually wrap at least some coverage into the price of the new auto in order to encourage a regular relationship with the owner.
Limited insurance emerges for old model autos. Increasingly limited insurance emerges for old model autos. The bumper-to-bumper warranty expires, the ability train warranty eventually expires, and the amount of impact and comprehensive insurance steadily decreases based on the market value of the auto.
Certain older autos qualify for additional insurance. Certain older autos can qualify for additional coverage, either in terms of warranty specifics for used autos or increased impact and comprehensive insurance for vintage autos. But such insurance emerges only following a careful evaluation of the automobile itself.
No insurance emerges for normal wear and tear. Wiper cutting blades need replacement, brake pads degrade, and bumpers get marks. These aren’t insurable events. To the extent that a new car dealer will sometimes cover some of these costs, we without effort understand that we’re “paying for it” in the cost of the car and that it’s “not really” insurance.
Insurance doesn’t restore all vehicles to pre-accident condition. Car insurance is bound. If the damage to the auto at any age is higher than the value of the auto, the insurance organisation then pays only the value of the auto. Except for vintage autos, the value issued to the auto falls over time. So whereas accidents are insurable at any vehicle age, the amount of the accident insurance is increasingly limited.