Many Kinds of Insurance Are Superfluous
Given all the insurance they sell, one might ask what business auto rental companies are in. The collision damage waiver, personal accident insurance, personal effects protection and additional liability could add another 55% to the basic daily rental; the daily rate on one recent Avis rental would go from $34.88 to $53.78.
Everyone offers incidental insurance these days, if not as much as auto rental companies. Bits of insurance are stuck like fungus to all kinds of financial transactions, often taking more from the live host than they give.
Such insurance is “collected as part of something else, anything you can add a few bucks onto,” says Robert Hunter, president of the National Insurance Consumer Organization in Alexandria, Va. “You rent a lawn mower,” says William McCartney, Nebraska’s insurance commissioner, “and the contract could have something like a collision damage waiver in it.”
Contact Lenses, Too
Credit card issuers regularly offer insurance to cover cardholder liability on lost or stolen cards, credit insurance to cover card payments if the cardholder is disabled or unemployed, even unrelated health or accident insurance. Banks try to enroll account holders in group health and disability policies. Consumer contracts for mortgage, auto and personal loans include offers of credit life, credit health, credit disability and unemployment insurance, which promise to pay the particular creditor if the borrower dies or is incapacitated.
People buying travel tickets are offered flight insurance, accidental death and dismemberment insurance, cancellation insurance. Contact lens buyers are offered contact lens insurance. People with telephones can now insure their inside wiring for a dollar or so a month. There’s even mugging insurance and rain insurance (which pays if it rains a certain percentage of one’s vacation).
“We already spend 15% of our disposable income on insurance,” says Hunter. According to A. M. Best Co., the Oldwick, N.J., organization that analyzes the industry, life and health insurance took in $234 billion in premiums last year, property and casualty $192 billion. In Hunter’s estimation, another 1% or 2% of disposable income may go to incidental insurance products otherwise uncounted.
The incidental stuff isn’t exactly the original concept of insurance, which involved groups of people pooling money to cover catastrophic losses suffered by any one of them. Somewhat less vital, incidental insurance often covers setbacks that are small, unlikely or temporary, or invokes a general concern and addresses it with very limited benefits at a comparatively high price.
There are many arguable reasons why such products have proliferated. What’s unarguable is that “it’s an additional way to make money,” says McCartney, whether one is selling trips or car rentals or loans.
It’s also easy. “It’s a product (that) takes nothing to produce,” says Illinois insurance commissioner John Washburn. “Once you’ve negotiated a group contract, it’s just a promise and a piece of paper. And once you’ve sold it, it’s attached to the monthly bill.”
There’s no competition for the sale, no advertising, no market research. The seller “has the market right there,” says Hunter, “because something else is being sold. They have monopolistic information--of who’s buying a car, who’s taking a trip.” And they have his ear, unopposed.
It’s also a very profitable little side business. Credit card “protection” companies may give card-issuers 20% of the take for “enrolling” cardholders in such plans; credit life and credit disability insurers may give the “endorsing” institution more than half the premium.
The result is not competition for the consumer’s business, which lowers prices, but a reverse competition. Insurers are competing for the endorser’s acceptance and competing with commissions: The higher the commission, the higher the price of the product.
For consumers, the product isn’t always such a good buy. For one thing, though it may sound cheap expressed in dollars or even pennies per day, it’s often the opposite: $7 to cover one 12-hour risk of death in a plane crash is a premium rate of $5,110 a year, and bank card credit insurance of 2 cents a day per $100 balance is $72 a year for people charging $1,000 a month. Such insurance is expensive (even before commissions are added) because it’s not “underwritten”: Applicants aren’t investigated or qualified, and all risks are accepted--30-year-olds and 60-year-olds alike.
Benefits are often of limited value. “They say ‘If you die, don’t you want your wife to have the house, or the car, or the refrigerator?’ ” says William Shernoff, a Claremont attorney specializing in insurance cases. “It implies the insurance will pay off the loan, but it may only pay 3 years of a 20-year mortgage, or one year of an auto loan.” Similarly, bank card credit disability pays only the minimum monthly payment, not the balance.
The coverage may also be duplicative or unnecessary for many consumers. Their own auto policies may cover collision damage to rental cars; their homeowner’s policies may cover theft away from home and credit card liability. Or if they’re not covered for death and dismemberment, say, in a rental car, must they be? “Why does one need more coverage if renting from Hertz,” asks McCartney, “than when driving one’s own car down the street?”
Why, for that matter, buy insurance products a la carte, covering one flight at a time, one loan? “We say you should buy comprehensively to cover financial catastrophe,” says Hunter. “If you have good life insurance, you don’t need more to cover one airplane ride.” And buying insurance in aggregate amounts to cover all one’s obligations is much more economical.
Actually, the biggest problem presented by incidental insurance is how it’s sold. Typically appended to another transaction, an afterthought to the main sale, it cannot be evaluated at all. The salesperson, rarely knowledgeable about insurance, “is just checking boxes,” says Shernoff. “The consumer doesn’t read a policy or even a brochure, and doesn’t ask a lot of questions because the insurance is not the main interest. People just don’t understand what’s happening.”