The FCA identified that the ‘add-on mechanism’ weakens consumers’ ability to discipline firms by shopping around and comparing products effectively. This in turn has implications for possible remedies. Baker et al have identified four ways regulators can reduce this market failure:

1. enhanced disclosure (which they explain doesn't work), 
2. a ban on the point of sale offer of add-on insurance, 
3. price regulation (commissions often capped at 20% but not insurance profits), and 
4. the creation of a new, on-line market (forcing sellers to show stand-alone competitor quotes)

If you don't want to wait for regulators and you dont fancy scouering Reddit for possible insurance solutions and providers (e.g. domestic travel insurance providers to cover collision damage waivers) you may want to consider PeerCover. PeerCover is a fair and transparent way get add-on cover without the exorbitant rates.

Citation
Baker, Tom and Siegelman, Peter, "“You Want Insurance with That?” Using Behavioral Economics to Protect Consumers from Add-on Insurance Products" (2013). Faculty Scholarship. Paper 441.
http://scholarship.law.upenn.edu/faculty_scholarship/441

Add-on Insurance Products 'protect' consumers against small losses. Consumers tend not to shop and hence Add-on Insurance Products are highly profitable for sellers:

• claims normally are 20% to 30% of premiums 
  
• commission are normally at least 20% and often more than 40% of premiums
• insurance company profits are consistently greater than 10% of premiums

Examples include the extended warranties sold with electronics and home appliances, mobile phone damage insurance, gap insurance on car loans, the credit life insurance and identity theft protection sold with mortgages, car loans, and credit cards, and the collision damage waivers and short term liability insurance sold with car rentals

Surprisingly a significant proportion of people buy this type of insurance, reasons given are often:

• Peace of mind, 
• Convenience,
  
• I already committed to purchasing the primary product,
• I was pressured by the sales person,
• I didn't know I had bought it

The UK's Financial Conduct Authority (FCA) has produced an infographic which shows how consumer behaviour is affected when general insurance is sold as an add-on product as opposed to a primary purchase:

When you are renting a car, in most cases high excess insurance is included in the rental price. 

Often the terms and conditions of the insurance are unfair. In fact in Australia, the competition authority has been pursuing some rental car companies for just that, unfair contracts.

Even if the contract is 'fair' the high excess is normally $3k to $5k and rental car companies will often insist on a credit card bond for the full excess amount unless you purchase their low or zero-excess options.

Their zero-excess option is unsurprisingly a nice little earner for them; typically rental car companies will charge $17 - $20 per day. So, lets do the math:

• Annualized, the price per vehicle per year is $6,205 - $7,300. 
• Typical claims per vehicle per year are normally between 0.1 to 0.3, 
• Hence, on average rental car companies will only pay out $300 - $1,500.
  

The rental car company's gain is your loss. So how can you avoid it?

1. Check your current car insurance policy, some insurers will extend cover for rental car excesses
2. Check your credit card travel insurance, you may be covered provided you have met the conditions (international travel, majority of cost paid with card etc) 
3. Buy stand-alone domestic travel insurance which includes rental car excess insurance (e.g. 1Cover) 
4. If you are in the U.S. you can get stand alone rental car excess insurance
5. Freeze the full excess through your credit card bond, noting that rental car companies often state that it can take up to one month to unfreeze your funds and if you are in a crash you may be up for the full excess amount
6. Deposit one third of the excess through PeerCover sharing the risk with your peers

We don't think it just the rental car companies that are making motza from low excess options. That's why we invented PeerCover - so you can pay less for insurance whilst PeerCovering your high excess.

New Zealand manged to miss a lot of the damage caused by Tropical Cyclone Pam earlier this year. So what is the cyclone risk in New Zealand and how does it compare to say Australia?

The Global Risk Map provides useful insight. The map comes from the PSI Global Resilience Project, which is led by Insurance Australia Group (IAG) and was formally launched at a global insurance industry event in New York in June 2015.

ps If you are wondering why the there is a band around Malaysia where there are no cyclones. The explanation is that this is the 'doll-drums' a place with not much wind. Interestingly this is where cyclones are born but they need lateral wind to get fired up.

Takaful is the Islamic alternative to conventional insurance. Takaful is based on the idea of social solidarity, cooperation and joint indemnification of losses of the members. It is an agreement among a group of persons who agree to jointly indemnify the loss or damage that may inflict upon any of them out of the fund they donate collectively.

The main purpose of takaful is to help folks through bad times. Profit earnings is not the main goal, while sharing any incidental profits generated is acceptable. Conventional insurance faces barriers under Shariah Law because of: 

• Maysir (gambling) – underwriting of risks by shareholders in anticipation of a profit is prohibited, 
• Gharar (uncertainty) – the insured pays premiums in exchange for indemnity against risks that may not occur and 
• Riba (usury) – the company engages in investments that derive their income from interest and/or prohibited industries.
  

PeerCover which offers peer-to-peer insurance is a form of co-operative insurance but is it Takeful? Please let us know by commenting to this blog.

For more information on Takeful see: 

• Hussain, M.M. and Pasha, A. T. (2011). Conceptual and operational differences between general takaful and conventional insurance. Australian Journal of Business and Management Research Vol.1 No.8 [23-28] 

• World Bank presentation ‘Takaful and Mutual insurers: alternative approaches to managing risk’; 
• International Co-Operative Alliance web site.

insure a peer explains p2p auto insurance. If you would like to learn more about insure a peer, click on their name or send them an . 

Selling insurance is not the same as selling physical goods like oranges or iphones. Insurer’s don’t “run out” of insurance. Subject to capital requirements, insurers can always make more insurance.
However, just like insurer’s can make more insurance they can also make less. How do they do this? They change their terms and conditions. By changing their terms and conditions insurers can add cover which sounds good but is not worth much or remove cover which is costly. Sometimes, to be really tricky, insurers will define cover in a certain way, which may mean the common sense definition does not apply.

If the insurer is just covering you for 35% less or worse 40% less, you may wish to reconsider. There are some good reasons why some insurers are cheaper, for instance:

• Tower’s insurance SmartDriver can rate your risk better
  
• Progressive (not in NZ yet) is 100% online, cutting selling and administration costs
  
• PeerCover lets you insure smarter by rating on things that an insurer can’t and sidesteps regulation
  
• Some health insurers are investing in wearables like SleepWakeApp
• AIA's wellness program (not in NZ yet) through Vitality 
  

So, if an insurer offering a 35% saving on your insurance – the question you should ask first is how.