Mind Your Ps And Ls

Sydney Morning Herald

Wednesday October 27, 2004

Ian Hamilton

Young drivers have been slugged with hefty insurance premiums, but it's possible to significantly lower the costs, reports Ian Hamilton.

Car insurance premiums have shot up for all drivers in recent years, but the group most badly hit is young drivers, who have seen premiums and excess amounts steadily heading north.

For many, it is rapidly getting to the point where the annual cost of insuring the car with a comprehensive policy is almost as much as the car itself.

The good news is the insurance industry is getting better at pricing risk and this has benefits for everyone - including youngsters - who drives safely.

The industry used to make a distinction between drivers under 25 and those over that age when pricing premiums, but there is now more emphasis on driving history. Young adults who can show they are a better-than-average risk and drive safe cars can significantly lower their premiums.

However, they can't avoid age as a risk factor altogether. Young adults have less experience on the road and tend to drive faster, with the result that they have more accidents and often do more damage in a crash.

AAMI's Young Drivers Index for last year showed 14 per cent of drivers between 18 and 24 years experienced an accident in the previous 12 months, compared with 8 per cent of older drivers.

"Although they make up only 13 per cent of the driving population, young people

account for one-quarter of all drivers killed on Australian roads," says AAMI's corporate affairs manager, Ron Arnold.

NRMA says it applies a year-by-year stepdown in premiums from the time a

person starts driving, right through until the age of 65.

Driving history has become more important than age when assessing risk, with the result that premiums can vary widely among drivers in the same age group.

"It's wrong to assume all 19-year-old drivers are a high risk," says Graeme Adams, the head of underwriting at Insurance Australia Group (IAG), which underwrites the insurance for NRMA in NSW and RACV in Victoria.

It is true that about two-thirds of drivers under 25 do offer a greater risk, but this also means one-third are a lesser risk, Adams says.

They key to enjoying lower premiums is being classified as part of this low-risk group.

"How you behave on the road is going to increasingly affect your hip pocket," says the author of KPMG's recent general insurance industry survey, Andries Terblanche. He says whether you're a defensive driver or a higher risk is going to matter when it comes to premiums.

Market pricing surveys bear this out. A study by JP Morgan, released in July, found the average difference between the lowest and highest quote obtained for a given policyholder profile was 43 per cent.

Even more telling, the price difference between the lowest and second-lowest quote was 14 per cent. That's $140 a year on a $1000 policy.

This range was far higher than expected, and reinforces the old saying that it pays to shop around, says the study's researchers, Shane Fitzgerald and Mark Skurnik.

"The average consumer does not shop around, otherwise price variances of this magnitude would not exist," they say.

JP Morgan found NRMA/RACV and AAMI the cheapest on the whole for a typical 18-year-old car owner.

A national survey of 18 insurers in April by the Australian Consumers Association found the difference between the dearest and cheapest policies for young drivers was $1600.

For a family with a young driver on the policy, the range was $1150.

The accompanying tables highlight the enormous difference in premiums for the same set of circumstances. Our survey of six insurers shows the difference between the lowest and highest quotes for the 20-year-old driver was a massive $1530, with AAMI offering a 63 per cent saving over GIO.

The results can differ markedly, depending on the suburb, the age of driver and the type of car, highlighting the need for individuals to compare quotes widely, not just when buying a new car, but at renewal time every year.

Risk ratings

There is a long list of factors insurers take into account in determining a driver's premium. The weighting given to each factor and the effect on premiums isn't always obvious.

Insurers emphasise that the single most important determinant of premiums is not your driving record but the price value and type of car you drive.

That's because an expensive car costs the insurer more to replace or repair. Similarly, if the car's more accident-prone, it's bound to pose a greater risk to the insurer's bottom line. Popular four-wheel drives, for example, are perceived as safe, but that's not always the case.

They are top-heavy and more likely to roll if driven out of control, says Michael Weston, the chief executive of Insurance Australia Holdings, a British-owned company that operates under the Budget Direct brand.

For some insurers, the combination of high performance vehicle and inexperienced driver sends the premium off the scale. It could preclude cover altogether.

"The more powerful the vehicle, the higher the likelihood of an accident," Weston says.

An under-25 driving a Subaru WRX, for example, stands little chance of being insured at Budget Direct.

A history of accidents and traffic infringements are the next biggest determinants of what you will pay, followed by the suburb you live in (with high theft rates or traffic congestion a key factor) and whether the car is financed or owned outright.

"If you buy a car outright with your own hard-earned cash, you're a better risk," Weston says.

Cars used for business and those that have modifications will also attract higher premiums.

The experience and driving history of secondary drivers using the car also counts.

In short, buying a cheaper car with a better safety profile and low power-to-weight ratio will produce a lower premium. Using your own savings rather than taking a lease or loan to buy it will further cut the cost, as will avoiding modifications and letting other young drivers behind the wheel.

All in the family

The option of insuring on the parents' existing policy can reduce the cost of cover in the short term. The extra premium

charged will typically be less

than the cost of separate cover. This may not, however, pay off in the long run.

"You won't earn a no-claim discount until you start to insure in your own name,"

IAG's Adams says.

There are also steep age-based excesses that apply on top of the standard excess in the event of a claim when a young driver is on the policy.

A younger driver at fault might have to pay an excess of $1000-$2000 on top of the standard $400-$500 excess.

The general insurance industry's dispute resolution body, Insurance Enquiries and Complaints, warns that the biggest cause of claims disputes involving young drivers is the non-disclosure by parents that their children regularly drive the family car.

Insurers want this disclosed so they can add a premium loading to cover the extra risk.

Some companies won't insure drivers under certain ages at all - this could be under 22 or under 25. Declining to insure becomes more likely the more expensive the car is, a spokeswoman for IEC says.

The ultimate test of insurance cover, of course, comes when you most need it - at the time you make a claim. That's when any incorrect information given will

be uncovered.

Neglecting to tell insurers that modifications have been made to cars or that traffic infringements have been incurred are other factors that often result in claims being rejected.

Budget Direct quotes the example of an insured driver who said he had no driving offences when signing up. When he came to make a claim, it emerged he had 21 offences to his name. His claim was denied and his policy cancelled.

Go the distance

Doing the hard yards and shopping around paid dividends for Julie Taylor, a 21-year-old bio-medical student at Deacon University who decided to compare car insurance quotes for her 1990 Holden Nova when renewal time came around.

After having one at-fault accident during the previous year, she found her premium with RACV had jumped by about $200 - from $630 to $842.75. The excess had also gone up substantially - from $800 to $1450.

Taylor, from Ashwood in Melbourne, bought her car for $6000 with money she had saved. The high excess - and how she would afford it in the event of an at-fault accident - worried her.

Rather than pay the increase, she decided to see whether she could find a better deal.

"I spent a morning going through the Yellow Pages and ringing everybody," she says. "It was annoying, but it was worth it - there was a massive variation."

For her circumstances, Budget Direct offered the lowest premium at $754.90 and an $850 excess.

She has a "ladies driver policy", which means she has a basic excess of $450 and an age excess of $400, which applies to drivers between 21 and 24. Male drivers are liable for a special excess of $200.

Her boyfriend, who is older than 24, is listed on her policy. The excess that

applies in his case is the basic of $450, and the male driver excess of $200. Any driver not listed on her policy is up for an extra $500.

As no one else drives her car, she is happy with this arrangement.

Taylor obtained full quotes from eight insurers and found premiums ranged up to $1700.

Tips for young players

To cut insurance costs, look for a car:

* that is cheaper

* with a good safety profile

* with a low power-to-weight ratio

* you can pay for outright

* that has no modifications

DRIVING PREMIUMS DOWN

Choose a higher excess Most insurers lower the premium in return for a higher excess. AAMI places an emphasis on the trade-off between premiums and excess. It says a higher excess helps people drive more carefully - a claim backed by a consulting psychologist, John Cheetham.

"A person who is driving around with a $2000 excess on their insurance versus a standard excess might think twice about taking a risk that could involve them in an accident," he says.

Consider the value of the trade-off - how much extra will you have to pay in the event of a claim?

Remember that your excess is something you only pay in the event of a claim, while your premiums are paid year-in and year-out. Also, though, consider how much insurance you are really buying when the excess is $1000 or $2000 and the average claim, according to the GIO, is less than $3500.

Multi-policy discounts Insurers with other lines of insurance beyond motor vehicle cover often offer discounts to customers holding more than one policy with the company. NRMA and RACV, for example, offer a 10 per cent discount if you take out a home contents policy as well as car cover.

These discounts, however, should not prevent you comparing quotes - it may still work out cheaper to get policies with separate insurers.

Advanced driving courses Some insurers will offer a lower premium to young drivers undergoing driver education courses.

Courses that emphasise the driver's education and attitude rather than driving skill are more likely to create safer drivers and be more likely to earn discounts from insurers.

AAMI, for example, offers a free one-day driver safety course for under 25s if they or

their parents are comprehensively insured by the company (see story at right).

People who have completed the course are eligible for a 10 per cent rebate on their comprehensive insurance until the age of 25.

Specialist insurers As the insurance market gets more sophisticated, there are more insurance brands specialising in particular types of customers: retirees, business owners and now young drivers.

JUST Car Insurance offers car insurance cover to those who would be rejected by other insurers: drivers of high performance and modified cars, those with a poor driving record or first-time drivers with no insurance history.

The company, an agency of AAMI, says it is now targeting all younger drivers, and so offers another option for quote comparison.

LEARN TO SAVE

After incurring the cost of buying a new car recently, Brian Combes, a 22-year-old sales assistant from Epping, Sydney, was keen to shop around to find the cheapest insurance cover.

He found AAMI among the cheapest for his circumstances and, because he agreed to do the insurer's Skilled Drivers Course, he received a further discount.

"As part of the package they offered a free driver program and 10 per cent off my car insurance," he says. "That appealed to me, because I'm already paying off the car."

His premium of $1074 will reduce by more than $100 when he receives a rebate cheque now that he has completed the course.

Combes says he and other young drivers were amazed at what they learned on the course, a combination of theory and practical instruction. In particular, they were surprised by the distance required to stop a car even when travelling at a moderate 40kmh.

© 2004 Sydney Morning Herald

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