Accident Forgiveness – Meh

Insurance companies love selling “accident forgiveness” on their auto policies.  Ever wonder why they’d do that?  Consider this:

An insurance company has 10 clients.  Statistically let’s say they know that 2 of them will have an accident in the next 5 years costing $5,000 each.  So over the next 5 years they’ll spend $10,000 paying claims, but let’s say they only collected $8,000 of premium for that same period.  Consequently, they need to raise rates enough to make up the additional $2,000.

Here are the options the insurance company has in order to remain profitable:

A). Without accident forgiveness, it makes sense that the 2 who got in an accident will see their premiums go up by $200 for the next 5 years to collect their $2,000 back.  If either of those 2 clients leave before 5 years are up, however, the insurance company doesn’t have a chance to make up the cost of the claims.

B). Or, they sell each of the 10 clients “accident forgiveness” for $40 for 5 years.  The same 2 get in accidents and their rates don’t go up, but the insurance company collects $2,000 from the “accident forgiveness” premium.  The 2 who caused the accidents are happy because their rates didn’t go up, the insurance company’s happy because they pre-funded the claim cost and don’t have to raise premiums, and the 8 who didn’t get in an accident think they are happy because their accident might be next and who wants to give up their accident forgiveness benefit?

So it sounds like everyone’s happy, right?  And maybe everyone should be.  But I have a concern that the “accident forgiveness” is a profit center that puts more money into profit than to cover losses.  And maybe that’d be okay, but I also think it provides another avenue for arbitrage and manipulation without traditional correlation and relevance in rate and market selection.  I do not know one way or the other.  But what I do know is that at least one insurance company pays their agents MORE as a percentage to sell policies that come with “accident forgiveness” (and many other add-ons).  And when it starts to seems so important to try and convince me and my clients why they should buy stuff like this, it not longer feels like we’re dealing with a true consumer-driven benefit.