Insurance Competition: Are You A Better-Than-Average Driver?

The state of Massachusetts has many wonderful assets: an ocean that's useful for both commerce and recreation, proximity to both the urban delights of New York City and rural pleasures of Vermont, New Hampshire and Maine, an educated work force, numerous technology companies, world-class institutions of higher education, and arguably the best baseball, football and basketball teams in the world.

But it also has the worst drivers in the world, as measured by the cost of our insurance claims.

Industry experts say this is due to several factors beyond our control.

First, our traffic density is high.

Second, snow and ice and those other wintertime pleasures often make driving more difficult.

Third, all those colleges bring lots of less-experienced drivers to the state.

But there is one more factor that contributes to our high rate of insurance claims, and that's the structure of the insurance system itself.
If you're not from Massachusetts, I suggest you keep reading so you know what your state should avoid in the future. And if you are from Massachusetts, I expect you will keep reading because you have a stake in this.

The insurance industry in Massachusetts has been regulated since 1927, but it's what the regulators did in the late 70s that really messed us up.

They closed the door on competition.

Since then, insurance rates for all companies that do business in the state have been determined annually through a state hearing process, and all companies must charge the same rates to the same classes of drivers.

The factors that affect the class you're put in are your experience (under six years means you pay more), your driving record (accidents, speeding, etc.), and your location.

Factors that don't affect your premium are your age, marital status, sex, profession, homeownership, credit score, income and level of education.

Yes, those things are relevant, but Massachusetts insurance companies can't consider them!

Furthermore, low-risk drivers subsidize high-risk drivers; the average Boston driver is subsidized by non-Boston drivers, and the average inexperienced driver is subsidized by experienced drivers.

Also, no matter how bad a driver you are - even if you total a car every year - you can still get insurance. The cases that the insurance companies don't want are parceled out among all the insurance companies in the state.

And what has this experiment of nearly three decades yielded?

Well, most obvious is the fact that since 1990, 35 insurers, including a number of national writers, have left the Massachusetts market.
There are now just 19 insurers serving the Massachusetts private passenger automobile insurance market. We see the ads for low-cost insurance from Geico on TV, but we can't buy Geico insurance.

Less obvious, but no less important, is the fact that by reducing the links between insurance risk and insurance prices, the regulators unwittingly reduced the incentives that people have to drive safely!

Bad drivers do not feel the appropriate pain for their poor judgment, and good drivers do not feel the appropriate reward for their good behavior.
People drive more carelessly, they file claims more frequently, and thus we get the highest-in-the-nation rate of insurance claims.

This system has proven so successful that no other states have tried it. None.

And now Massachusetts, having recognized the error of its ways, is tiptoeing reluctantly back toward competition.

Under the new system, which is still unfolding and will debut in April, companies still will not be able to discriminate on the basis of factors such as credit scores, homeownership, level of education and occupation, but they will be able to offer competitive rates based on other factors, so it's a start.

And if Geico ever decides to offer insurance in Massachusetts, I'll be the first guy in line, because, like 68% of the people in a recent survey, I think I'm a better than average driver.

Yes, recently, when almost 900 licensed drivers were asked to rate their own driving skills, 48 percent ranked themselves better than average.
Another 20 percent reported being much better-than-average drivers. Thirty percent said they were average, and only two percent said worse than average. None of the drivers considered themselves much worse than average.

Funny, huh?


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If I could buy any insurance company, I'd buy Geico. Unfortunately, it's already owned by Warren Buffett's Berkshire Hathaway.

My second choice? China Life Insurance (LFC).

China Life was a government entity until it was sold to the public in December 2003, in the biggest Chinese IPO to date. It's the biggest life insurance company in China, by far, and it's getting bigger faster; revenues in the past twelve months topped $22 billion!

Revenues at the company grew 30% in 2005, 55% in 2006, and are on track to grow perhaps 50% for 2007. Earnings have been mushrooming, from $0.64 per share in 2005 to $1.42 in 2006 to an estimated $2.53 in 2007. And after-tax profit margins appear almost criminal; they were 23% in the latest quarter!

Underpinning all this growth, of course, is the growth of China; as the middle class booms in China, the insurance industry booms along with it.
And that's especially true for this firm, as the middle class lives a more affluent, independent life in cities, away from the extended families that provided support in the rural countryside.

But I wouldn't buy it just yet.

Editor Paul Goodwin of Cabot China & Emerging Markets Report owned LFC as recently as early November, but recommended selling after his China-Timer (a market-timing indicator) turned negative and the stock dipped below its 50-day moving average.

LFC performed worse than the market over the past two months and my guess is that it's going to touch its 200-day moving average before it resumes its long-term uptrend. That 200-day average is now at 65, and I suggest you keep an eye on the stock in the weeks ahead, looking for the stock and its 200-day moving average to converge.


Editor's Note

China Life Insurance could be recommended in any of several Cabot Publications, but by far the most likely is Cabot China & Emerging Markets Report. Editor Paul Goodwin continues to advise a cautious stance today, but as soon as the market strengthens, you can count on Paul to be recommending the most high-potential investments in his fast-growing universe ... most recently he stepped outside his core zone of Brazil, Russia, India and China to recommend a stock in Turkey!

His results, by the way, are most impressive. For the 12 months ended October 31, Hulbert says that Cabot China & Emerging Markets Report was the top performer of all investment advisories, with a return of 90%.

To get started with a no-risk trial subscription, simply click the link below.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Cabot Wealth Advisory

Timothy Lutts can be found on Google Plus.

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