Is my car insurance invalid if I've forgotten to tell them I've moved house?

vaio

raskazz wrote: »

........Not really, not if you consider the average cost of policy administration rather than the marginal cost.

Maybe true but surely a change of address or car is a marginal cost and following the "treat your customer fairly" ethos should be charged as such?

raskazz

vaio wrote: »

Maybe true but surely a change of address or car is a marginal cost

No it isn't - the cost of one transaction is the average cost i.e. the total cost of all transactions divided by the number of transactions. The total cost of all transactions includes fixed costs in addition to variable costs.

To put it in simple terms with an illustrative example, say an insurer took in total 2 phone calls to make an amendment per year:

The marginal cost of that second call is effectively nil.

However, the actual (average cost) of that second call is the sum of all costs (salary of the worker who answers, servicing and renting the building in which they sit, HR costs, cost of training and recruitment, IT software, hardware and support, internal audit, compliance, etc etc, say for the sake of argument £20,000) - divided by the number of calls (2) = £10,000.

Clearly £10,000 is a figure which is rather larger than nil. Hence why arguing that the marginal cost should be charged in such cases is economically illiterate.

In other words one call has a small marginal cost but the average cost is far larger as there are massive fixed costs in order to implement the infrastructure required to take that call.

vaio wrote: »

and following the "treat your customer fairly" ethos should be charged as such?

I have never seen any indication that the Financial Ombudsman would rule an amendment fee of up to £40 unreasonable.

raskazz

agrinnall wrote: »

You may be right but if the broker is charging £35 and the insurer £3 is the broker really doing over 11 times as much work as the insurer?

1) It is not clear whether the insurer's £3 is an admin fee or is for a change in risk.

2) Yes, the broker is "doing far more work" (i.e. incurring more costs to enable the transaction) than the insurer. This is because the broker will almost certainly transmit the change electronically to the insurer who will then process it automatically via their computer systems with no individual human input required. The broker has to pay the salary of the person answering the phone, their line managers' salary, they have to rent and service the building in which the employee sits, they have to pay for HR, recruitment, training, internal audit and compliance functions, they have to pay for hardware, software and IT support for the computer which the employee uses and telephony costs to give them a phone to answer. All the insurer has to pay for is the facility to automate certain IT processes.

vaio

raskazz wrote: »

No it isn't - the cost of one transaction is the average cost i.e. the total cost of all transactions divided by the number of transactions. The total cost of all transactions includes fixed costs in addition to variable costs.

To put it in simple terms with an illustrative example, say an insurer took in total 2 phone calls to make an amendment per year:

The marginal cost of that second call is effectively nil.

However, the actual (average cost) of that second call is the sum of all costs (salary of the worker who answers, servicing and renting the building in which they sit, HR costs, cost of training and recruitment, IT software, hardware and support, internal audit, compliance, etc etc, say for the sake of argument £20,000) - divided by the number of calls (2) = £10,000.

Clearly £10,000 is a figure which is rather larger than nil. Hence why arguing that the marginal cost should be charged in such cases is economically illiterate.

In other words one call has a small marginal cost but the average cost is far larger as there are massive fixed costs in order to implement the infrastructure required to take that call......

raskazz I respect your knowledge of insurance matters but your understanding of marginal costs is sketchy to say the least.

Fixed costs are just that, marginal costs is the extra cost of one extra call.

A better example is than your £10k one is my dear old dad. His insurance is just under £120 a year. For that the policy has been set up, address and registration numbers typed in together with all the other required details, papers sent, payment processed and cover for any accidents he has is provided together with renewal papers at the end of the year. The £120 covers all these costs and presumably generates a small profit.

To suggest that typing in a new address or registration number costs (or is worth) 40 or 50% of his yearly premium is ludicrous

raskazz

vaio wrote: »

raskazz I respect your knowledge of insurance matters but your understanding of marginal costs is sketchy to say the least.

I think you'll find that my understanding of marginal costs is just fine, thanks - unless you can actually point to any flaws in the reasoning or logic contained in my post?

vaio wrote: »

Fixed costs are just that, marginal costs is the extra cost of one extra call.

Yes, but what is the cost - not the additional cost, the actual (average) cost - to an insurer of one amendment where fixed costs are A, the marginal cost is B (very little - assume nil) and they make n amendments per year? It is A/n + B = A/n as we have assumed B is nil. So as I say, to assume that marginal cost should be the basis of calculation of administration fees is financially and economically illiterate. Fixed costs have to be covered one way or another and a model where those who place demands on a customer service function cover the costs of running that function is perfectly fair.

vaio wrote: »

A better example is than your £10k one is my dear old dad. His insurance is just under £120 a year. For that the policy has been set up, address and registration numbers typed in together with all the other required details, papers sent, payment processed and cover for any accidents he has is provided together with renewal papers at the end of the year. The £120 covers all these costs and presumably generates a small profit.

It is a terrible example! Part of the reason why administration fees are levied separately in most car insurance business models is so that upfront premiums are lowered - which gets insurers to the top of aggregator results. The public only have themselves to blame for increased admin fees in this regard.

vaio wrote: »

rTo suggest that typing in a new address or registration number costs (or is worth) 40 or 50% of his yearly premium is ludicrous

Well, can you provide any evidence to the contrary in the form of actual figures? I would think that an amount of anything up to £40 is reasonable (and furthermore in my experience has never been ruled unreasonable by the FOS as long as correctly disclosed) when you consider the enormity of the costs involved in running the following operations:

Employee salaries
Management salaries
IT hardware, software, support and telephony
Building rent, utilities and servicing including cleaning
Running a compliance and audit function
Running a HR function and recruitment
Running a customer relations department
Training costs
The costs of the underwriting function's involvement in dealing with referrals from customer services