Cedric Stephens | Value-driven motor insurance

Phil Town writes for global media company Forbes and is also a member of its finance council. That body is an invitation-only, fee-based organisation for senior-level US finance executives.

In his 2018 essay, ‘The important differences between price and value’, Town writes: “One of Warren Buffett’s most famous sayings (via Benjamin Graham, late economics professor, investor, and father of value investing) is, ‘Price is what you pay; value is what you get’. It is an idea that largely guides Buffett’s investment decisions and one that he has used to achieve an unparalleled level of success.”

What exactly does that proverb mean? Does it apply to other kinds of decisions?

Mr Town used the example of a US$5-priced gold bar to contrast price and value. The actual price of a 400-ounce gold bar is now about US$757,895. The US$5 price, he argued, is arbitrary. It was chosen by the seller for reasons known only to him. Value, on the other hand, is fundamental. Even though the gold bar is priced at only $5, its intrinsic value to the buyer is so much more than the selling price.

The difference between price and value can also be used to guide other kinds of decision-making, including insurance buying. Smart insurance buyers, in my opinion, invariably focus on perceived value – not price.

The Insurance Company of the West Indies, ICWI, recently introduced a new motor insurance product, called Comprehensive Complete. Company officials say that it was developed to focus on value. Its name suggests three things. It implies that ‘comprehensive’ does not mean all-embracing, as many persons believe. Comprehensive Complete signals that all comprehensive motor policies are not created equal. They differ. And third, ICWI’s value proposition – the promise the company legally agrees to deliver to customers should they choose to buy its Comprehensive Complete motor policy – provides better value for money than what other motor insurers offer.

When challenged about the assertion in the preceding statement, the company’s Vice President of Marketing, Distribution & Human Resources, Samantha Samuda, said the product development process was informed by data obtained from many sources: the company’s motor portfolio; customer feedback, especially about their expectations and challenges; and information collected from intermediaries and employees, including the company’s claims staff.

“Not all comprehensive policies are alike,” Mrs Samuda declared. “Additionally, we are not in complete control of the settlement process in situations where our policyholder is not at fault in a collision. So after conducting an in-depth study of what matters to our customers, especially at the time of a claim, we knew we had to do something different to meet their ever-changing needs. Comprehensive Complete is the result of those efforts. It gives the company more control over the claims process.”

ASSESSING THE KEY FEATURES

Alternative transportation costs: the company will pay for the cost of alternative transportation costs when the insured vehicle is destroyed, disabled, or otherwise unavailable because of a loss covered by the policy. The engine capacity of the replacement vehicle must not exceed that of the insured vehicle. ICWI will pay the actual rental charges for 14 days. My research indicates that other insurers offer an enhancement like this, but the amounts payable under their policies are arbitrarily set and do not cover the real rental costs.

Protected no claims discount: the discount will be retained indefinitely even when a claim is submitted.

Uninsured motorists: The value of this extra is best understood in the setting that about one out of every four vehicles on Jamaica’s roads operates without insurance coverage mandated under the Motor Vehicles Insurance (Third-Party) Risks Act. This means that in the event of an accident, it is likely that the other vehicle may be uninsured. When this happens, the policyholder who was not at fault could end up incurring substantial costs without any prospect of recovering those expenses. With this benefit, the policyholder will avoid much of the unexpected costs associated with motor vehicle accidents.

Key replacement charges or KRC: Motorists, particularly owners of newer model vehicles with electronic keys, are unaware of the costs associated with key replacement. These charges, according to one firm, can start from a low of $20,000 to a high of over $100,000, depending on the year of make, model, and type of vehicle. KRC is limited to $50,000 for the reasonable cost of replacing lost or damaged keys.

Excess eliminator: This betterment works like what bankers call a bridging loan. A bridging loan is a form of short-term loan that is used by a borrower as a continuing source of funds to ‘bridge’ the period until the borrower obtains other funds to replace it. One claimant, for example, obtained a bank loan to repair her damaged vehicle. She got a loan with the expectation that the third-party insurers would compensate her and that she would use those funds to retire the bank debt. This did not happen.

More than 12 months passed before the other insurer paid her claim. ICWI’s Excess Eliminator was designed to eliminate the need for its policyholder to fund the deductible or excess. If in the insurer’s judgment, the excess can be recouped from other insurers, ICWI will upfront the deductible. More succinctly: ICWI will pre-fund its policyholder’s deductible in those situations where it concludes that those expenses can be recovered from the insurers of the at-fault motorist.

TARGET

These product features of the new policy look more attractive when they are linked to other things that the company has done to improve its value proposition in the handling of claims. For example, ICWI representatives say that the company has sought to comply with the Financial Services Commission’s February 2019 Market Conduct Guidelines, particularly those relating to claims. It operates a dedicated call centre for the handling of claims. Policyholders are sent text messages regularly to track their claims as they move through the settlement process. Employees are specially trained to interact with policyholders and to provide value-added advice on a timely basis.

Motor insurance is viewed as a grudge purchase by many consumers. Comprehensive Complete would not be for them. Risk-averse, value-based insurance buyers – especially those who prefer high-end vehicle brands – should give this product a try. They could be in for a pleasant surprise.

Finally, I always study the fine print before I sign on the dotted line. If you follow this rule and pose hard questions to the service provider during the sales process, it will help you to extract more value from your insurance contract.

Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: aegis@flowja.com