Ever get lost in the confusion of auto coverages, just to get to the coverage you understand, your auto deductibles. A great deal of time is spent debating. “full coverage” or not, what the deductibles should be etc. But what about the “other” coverages and how to select limits and understand them?
I would like to describe a tool that can put into perspective how you can take control of your auto coverages limit decisions.
The chart above simply compares loss frequency(likelyness of occuring) to severity of the loss (financial amount). This does not have to be scientific, just place scenarios that relate to your ownership of a car and where you think they fall on the graph. For example you can try adding a lawsuit, tow claim, etc to the above graph. In addition, what you will start to see is that the deductible coverages (comp and collision) relate to higher frequency, but low severity. Because insurance companies must charge for underwriting, marketing, admin cost, and make a profit these types of losses don’t benefit as much from the pooling of the risk. In other words the insurance company is collecting dollars and then paying out those same dollars minus expenses the closer the frequency gets to definite.
Now on the other hand what about the losses that frequency is very low, but the severity is, severe. These types of losses are where insurance excels at creating a value even after expenses they charge. Coverages that fall into these categories are Liability limits, Uninsured motorist limits, and Property damage liability limits. So pay careful attention to these limits. A claim above the amount of insurance you carry can ruin even the most financially secure, as the severity is very high.
Back to deductibles, now understanding where some of the risks with a owning a car fall on the graph. Would it make sense to increase your deductibles to lower cost, and use that cost savings to afford higher liability limits? I believe so, and you are getting more for your insurance dollar. If you have to come up with an extra 250,500, or even 750 more for your deductible, that might ruin your day, week or maybe month, but having a liability limit of 25K and a 100K loss, putting you on the hook for 75K, that’s hard to recover from.
If you can afford both a low deductible and high liability limits, then there is nothing wrong with that too. Everyone has different risk tolerance, my job is to make sure you consider all the risks in your decision. The graph above is a good exercise to see the big picture.