Car insurance pricing

I just renewed my car insurance, and confess I find the pricing confusing (and not for the first time).

The original insurance was via AA, and the renewal (i.e. same insurer) l was quoted was £713.  Something I don’t recall them doing before, but a welcome addition, was to re-quote from scratch, with that re-quote being £523.  I changed my car during the year, so I can believe that the first insurer may have had less experience of that car, and so priced up.  They almost certainly put the margin up materially as well – some folks would be put off renewal, but for those who weren’t the extra margin would more than make up.

What I found surprising was when I came to re-check the new AA quote.  I reckoned that all brokers would use much the same panel, so I thought I’d go to Direct Line.  They quoted £434 – £90/17% less.  That feels too large a gap to explain as rational pricing even allowing for the broker margin.

My assumption is that insurers with enough data should make roughly the same estimate of risk, and if they don’t have enough data they will know and price for the uncertainty – they’ll get little business, but it should be safe to underwrite.  There is a wrinkle where I can see them underwriting too low, just to get more business (and so data) and allow future better underwriting.  So, I’d expect to see a floor in pricing with a few insurers materially higher, but few materially lower.  Since AA is a broker then their pricing should be close to the floor, plus their margin. Direct Line are 17% below that which feels too much to explain by broker margin alone.

So, I am left feeling that one of three things is true :-

  1. I am part of a deliberately underpriced group designed to allow Direct Line to get more risk experience.  It’s possible, but I assume that even then the difference is higher than required, and the samples would be small making my sleection less likely.  So, possible, but discounted for now
  2. Direct Line don’t know how to price for risk properly – at least for me/my car.  Also doesn’t feel terribly likely as it is the single core competency requirement of a high-volume motor insurer
  3. Brokers are terribly inefficient in market pricing.  Put another way, the money that a customer is prepared to spend to use a broker is much much higher than I expected, or I think should be normal in a rational market.

The third is the most credible, and it is possible that the pricing gap is lower for most people, so I am not seeing a typical spread.  But, as noted at the start, overall the pricing feels much more variable and confusing than I expected for what is in the end a commodity product.

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