Insurance

Optionality. The Choice is Yours.

April 3, 2013

“I’ve got an 83% chance of staying alive! Those are great odds.”

Don’t make dumb bets.

We recently read Antifragile, the latest from iconoclast and self-described flâneur Nassim Nicholas Taleb. If you’re unfamiliar with Taleb, he’s most famous for writing the predecessor to Antifragile,a book called The Black Swan. Its main argument is that there are certain events that defy prediction and that you can’t do anything about, other than minimize your risk of exposure to their negative effects (if any) and maximize your risk of exposure to any positive ones. The title derives from the Australian bird of the same name, which Europeans discovered in the late 17^th century, thus destroying the part of their worldview that held that swans are definitively white.

This isn’t a review of Antifragile. (Alright, here’s a review: Buy it, then read it slowly and repeatedly.) However, today we are concerning ourselves with one of Taleb’s fundamental recommendations: Put yourself in situations where the potential for a great reward is offset by the potential for a small loss, and avoid the opposite scenarios. If you need a concrete example, Taleb suggests that you should live in a big city. (He lives in New York.) That way you can increase the likelihood of having random encounters with people who can benefit you. Go to enough cocktail parties on the Upper East Side and you’ll find someone who can look at your business proposal, or at least put you in touch with someone who can.

On a macro scale, Taleb cites federal government intervention in the economy that’s always done with the promise of a (modest) benefit, yet invariably ends with (unanticipated, gigantic) costs. Fannie Mae and Freddie Mac will serve as the definitive examples of this until something greater and more destructive comes along. Single-payer healthcare, maybe. The temptation to take the path of least resistance, when resisting can result in disaster, never enters these bureaucrats’ vacuous heads.

Which brings us to a real-world example of our own experience. Last summer, your humble blogger got a speeding ticket. 40 mph in a 35 zone, on a moderately used divided 4-lane road that’s flanked by a series of car dealerships. Shortly after they’d closed for the day. Meanwhile, not 100 yards away on the nearby U.S. highway, several drivers were cruising in the passing lane and thus driving far more dangerously than anyone driving in excess of 5 mph in a commercial zone would be. But we digress.

The ticket is exorbitant. $205, but the very act of going down to the county court house and acknowledging receipt of the ticket will knock it down to $140 and a non-moving violation (i.e., no harm to the driver’s record and no disclosure to the insurer.)

Or we could fight it. Which carries a potential risk and a potential reward. Let’s see what a rational person, or at least a Taleb reader, should do in this situation.

Choose not to go to court, and we’re looking at a certain debit of -$140. So that’s our baseline. Proceed on the most conservative path possible, the equivalent of buying T-bills, and that’s how much we’ll be out. So let’s consider that $140 an all-but-irretrievable sunk cost, and proceed from there. What happens if we fight the ticket? There are 2 possible outcomes:

Not guilty/case dismissed. Net gain, +$140.
Guilty. This one’s more complicated. The fine will be for the full amount of the ticket, $205. A guilty verdict also means 1 point on the license, which, as best we can estimate, will result in a 15% increase in premia over the next 3 years. That’s about another $500, ignoring the time value of money. Sum it and that’s a net loss of $565. (Remember that we’ve already accepted that we’re down $140 by doing nothing and paying the reduced fine already offered by the court.)

So by taking the risk of going to court, one of 2 results will happen – a $140 gain, or a $565 loss. Neither of which mean anything without examining our chances in court.

Our case is less than airtight. We did everything you’re supposed to (take video of the crime scene, come up with a list of questions to ask the officer, and then request one continuance after another), but we’ll be going up against an officer who’s so diligent that he went to the trouble of writing the radar gun’s calibration data on the ticket. He’s been on the force for 6 years, has already been an officer involved in an officer-involved fatal shooting, makes 6 digits a year and looks about 19 years old, so the likelihood of him having retired before the court date is slim. If he gets 3 weeks of vacation a year, the chance of the trial happening during one of them is about 6%. If he shows up, we can pencil in an L.

Our research indicates that officers show up for similar cases at least 60% of the time, and we could probably jack that up a few percentage points. So that’s a reduced chance of winning (enjoying a $140 gain), and a substantially greater chance of losing (incurring a $565 cost.) Even a lottery ticket, though its odds are atrocious, offers a huge payoff balanced with a tiny cost. Fighting this speeding ticket offers the opposite.

We’ll be contacting the prosecuting attorney and writing our $140 check tomorrow.

Filed Under: Insurance, Making Smart Choices, Math Tagged With: antifragile, Insurance, nassim nicholas taleb, police, speeding ticket

What coverage should you get when renting a car? (II of II)

November 25, 2011

You missed Wednesday’s Part I on car rental coverage? Go back and read it again, it’s really good. And you won’t understand today’s post if you don’t.

The irony? She was using Allstate’s iPhone app at the time.

Fine, we can’t force you to read it. It’s about the different kinds of insurance add-ons car rental companies charge, and why they’re largely a waste of money. We saved the best one for the end, one that can end up costing you more than the rental itself.

PPP – Personal Protection Plan

Again, here “plan” is a euphemism for the taboo word “insurance”, a service only licensed insurers can sell. Oh Christ, what a rip this one is. This is for any medical expenses, up to and including death benefits, that you or your passengers might incur while renting the car.

Your existing health insurance doesn’t have a subsection that reads “this policy null and void if insured rents a car.” Thus, you’re covered. If you don’t have health insurance, you might indeed have good reasons for forgoing it. But then why would you buy only a few days’ worth of coverage, only to resume your uncovered status when you drop the keys in the overnight box?

In addition, your own auto policy gives you the option of including medical payments coverage. Lots of people don’t bother paying for it, but you should. Not for yourself, but it’ll cover your passengers and anyone you might hit. Which is getting us off the topic of rental insurance…

PEC – Personal Effects Coverage

This is a bigger rip than PPP. For $5 or thereabouts, PEC covers anything that might get stolen in the car. Again, you probably have this in your existing policy (it’ll be part of a subset called “property damage coverage” or something similar.) If you don’t have it, get it on your main policy, not your rental policy. Even if you do buy PEC, it covers only you and family members you live with. Go on a business trip with a partner, and the partner’s personal effects wouldn’t be covered anyway.

ESP – Emergency Sickness Protection

This is PPP, but for cholera rather than for greenstick fractures. And again (we’re starting to wish English had a synonym for “again”), you should already be covered with your existing health insurance policy if you have one.

If you want an extra layer of protection on top of that offered by Progressive and Blue Cross, any respectable credit card issuer will have you covered. Even the zealots who hate credit cards on principle will acknowledge that you have to have one if you plan on renting a vehicle: so shouldn’t you use a card that protects you?

American Express includes free Car Rental Loss & Damage Insurance with every card it issues. It includes most of the subsets of insurance listed above. When you add it to your main policy, it’ll cover most every possibility you could encounter. For instance, however much your main policy covers for damage, theft, or loss, American Express will cover an additional $50,000 just for the asking. In fact, you don’t even have to ask. Even Discover, the poor man’s American Express, supplements your coverage to the tune of $25,000.

(NOTE: This is not an endorsement of American Express’s Premium Car Rental Protection, a joke of a service that costs you money. It’s $25 per rental, and it acts as your primary coverage for the length of the rental. You already have primary coverage from your insurer.)

Finally, fill the freaking tank before you drop it off. You can’t not know this, can you?

EVEN THE EMPLOYEES know this is a rip

Okay, we’ll walk you through it. The rental agency typically gives you three choices for bringing the car back with a full (or however full you found it) tank:

Fill it yourself.
Let them fill it for you, at some ridiculously exorbitant price.
Buy a full tank now, at the agency’s own ***DISCOUNTED!!!*** price. That way you won’t have to look at the gauge and can return it with as little gas as you like.

Obviously, the agency makes option b) so unpalatable that you won’t consider it. However, the agency understands that the same part of your brain that rejects the idea of paying $5.40 for a gallon of gas will gladly pay National’s $3.50 instead of the $3.63 at the pump down the street. If you fall for this, we’ve got a word for you: Catostomidae.

You’ve got to be all shades of dumb to believe that a car rental agency pays less than retail for gas and then gladly passes the savings on to you. The agency knows that if you buy their $3.50 gas, they’re profiting off you if you bring their car back with anything beyond fumes in the fuel tank.

If you’re certain that you’ll return the car with no gas in the tank, let Avis fill it for you when you return. To do that you’re going to have to know how many miles your rental gets per tank, then fill it when you know you’re that many miles away from returning it. Sure, that sounds easy to do. Just fill the freaking tank yourself.

This article is featured in:

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Filed Under: Consumer Debt, Credit Cards, Economics, Making Smart Choices Tagged With: Alamo, Avis, car rental, Hertz, Insurance, Thrifty

What coverage should you get when renting a car? (I of II)

November 23, 2011

You know what the markup on this gut bomb is? EIGHT MILLION PERCENT.

As any savvy retailer knows, the basic products themselves aren’t the profit centers. The extras are. Otherwise appetizers, alcohol and desserts wouldn’t exist.

When you buy insurance on your personal vehicle, you have all the time you need to shop around and run numbers. When you buy insurance on a rental, you’re subject to a monopoly. Plus a clerk is staring at you, and another customer is waiting in line behind you; those are hardly the optimal conditions for making an informed, rational decision.

(Hey, what do you know? This boldfacing gimmick really works. Lots of eyes making their way down the page as we speak. What a fantastic idea. Should have done this months ago.)

The standard rental insurance policy is in zero-point green font on the back of the pink copy of a triplicate sheet that you’re not reading the back of anyway. You don’t want to spend any more time than you need to at a rental desk, and that goes double if you just got off a plane and have an inviting hotel room waiting for you. You just want to get out of there, especially if the alternative is reading paragraphs of legalese. So it’s tempting to just ask the clerk what every type of additional coverage means, then treat his non-binding oral descriptions as Gospel.

Don’t. Coverage can not only exceed the cost of the rental itself, it’s almost always redundant.

There are 17,756 possible 3-letter acronyms in the Roman alphabet. The car rental industry has a corresponding type of coverage for every one of them. Here’s what they are, and why they’re mostly useless. We’ll start with a couple of easy ones. Then on Friday we’ll show you where the car rental agencies do the most efficient job of separating you from your money:

LDW – Loss Damage Waiver (similar to its less encompassing cousin, Collision Damage Waiver, which is offered by some rental companies.) If you rent a car and someone steals it, or vandalizes it, or it gets in an accident, or hailstones fall on it, or it hits a pedestrian who survives and feels litigious, someone has to make good.

LDW is insurance, but the rental companies don’t call it that because they’re not licensed to sell insurance. They use the term “waiver” because when you agree to pay the extra $20 a day, the agency itself is waiving its right to charge you for damages.

We can sympathize with people who argue that LDW gives you peace of mind, which it does. But even peace of mind should submit to cost/benefit analysis. If someone offered you an all-inclusive lifetime medical policy, one that covered everything from standard office visits to trauma care, to all the Purinethol pills you could swallow, would you take the policy – if it cost $5 million?

If you drive, as you probably know if you drive, you have to have insurance. If you’re one of the few people who has a valid license with no existing insurance (certainly possible, if you live in downtown New York or Toronto or somewhere and gave up possessing a car), the rental agency can, and should, require you to buy LDW.

That leaves the 99+% of us who actually use our licenses, and whose primary insurance will cover us first. READ YOUR (primary insurance) AGREEMENT. People don’t like reading agreements. That’s why we have a subprime mortgage crisis in this country, a crisis created by homeowners.

If you temporarily transfer your State Farm or AAA or whomever coverage to your rental car, your deductible will still apply. Which is only fair, isn’t it? Causing damage, in CYC’s carefully ratiocinated opinion, is bad.

Of course, you need to think a little harder if the car you’re renting is vastly more expensive than the car you drive primarily. Say you rejected comprehensive coverage when you bought the policy to cover your 1986 Yugo. (Which makes sense. If a $1200 car incurs $1000 in damage, you should sell it to a junkyard.) But that leaves you exposed if you rent a Jaguar. Also, why the hell are you renting a Jaguar?

Yes, the LDW will cover you for such unremarkable mishaps as flat tires. But your rental vehicle comes with a spare, and most tire places will repair a flat for next to nothing.

SLI – Supplemental Liability Insurance

For $9 a day, give or take, this gives you up to $1 million in excess liability coverage. Above we listed scenarios, however unlikely, in which LDW might make sense. There’s no scenario in which SLI makes sense. If you’re not carrying enough liability insurance on your primary policy to begin with, the Enterprise counter isn’t the place to make a necessary lifestyle change. Instead of marking an X in the Hertz box, call your insurer and add the coverage on your main policy.

Presumably, you can live with a minor dent in a panel on your own Toyota Camry. But when you get a similar dent while driving a car from Alamo, they’re going to be less forgiving about it. Hence the deductible, previously alluded to. The likelihood of you incurring damage greater than your deductible during the brief period that you’re renting the car is small enough that you should play the odds and forgo the supplemental insurance. If it isn’t, then you’re a crappy driver and shouldn’t be renting a car (or getting insured) anyway.

If you think that’s bad, wait 48 hours. More financial skulduggery, and how you can combat it, Friday.

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