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I've always been confused by things like this:

  1. Joe has his car stolen or drives it into a wall by accident, or some other kind of accident happens which "goes on the insurance".
  2. Joe gets money from his insurance company.
  3. Joe says: "Nah! No big deal! It was all covered on my insurance!"

But isn't it a big deal after all? I cannot imagine that the insurance company just happily pays out money like that, with no downside to Joe. Their whole business is based on collecting monthly fees and not on paying out expensive new cars to clumsy/careless people.

Surely the company must punish Joe in some way, such as increasing the monthly fee that he has to pay? If not, a customer can cost them a fortune by continuously crashing cars by accident and getting new cars on the insurance.

So when Joe claims that it's "no big deal", how short-sighted can you get? Does he not even think of the next monthly insurance bill, which will now have an extra $50 added to it or something?

I'm asking this as a person who has never once in my life had any kind of insurance on anything. The whole concept of "insurance" always seemed strange to me. It seems like it would always be better to simply save money yourself, so that you can buy a new car in case there is an accident. That way, you don't perpetually pay a company even if there is never an accident, and you could use it for something else, etc. Since they are a business, they are obviously going to make more from the customer than they ever will pay out, so it seems almost like a polished scam to me.

I must be missing something.

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    So if you plan to buy a car, you always make sure you have enough money to buy two cars, because the first one might get totaled five minutes after you start driving it and you need to buy another one? (Or really, you need enough money to buy three cars, because something similar might also happen to the second one...)
    – alephzero
    Oct 7 at 3:06
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    Insurance is tradeoff between expected value of outcome vs variance of the outcome.
    – eps
    Oct 7 at 4:33
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    @jamesqf Everything has a cost. Cars that are old enough where insurance isn't needed lack the safety features of the newest cars. Yes, you are saving money, at the risk of a fatal accident which in a modern car you would walk away from without a scratch. Particularly if you are talking about cars where the average person can still perform most mechanical work, those are significantly less safe than a car < 5 years old. Again, expected value vs. variance. Very bad accidents are rare, but if you are in one you will massively regret your choice or be too dead to be able to.
    – eps
    Oct 7 at 4:38
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    Forgot to add, OP, the thing you are missing is that cars can cause an enormous amount of damage. Literal millions in worst case scenarios, but even ignoring those you could potentially be responsible for 100's of thousands in damages. Do you have 100k you can toss away if you run off the road, hit a person or two and demolish a storefront? Once again, EV vs V. Bad outcomes are rare but tail events are unimaginably expensive to fix.
    – eps
    Oct 7 at 4:45
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Insurance is all a big numbers game, based on the concept of pooling losses. Certainly, insurance companies would love to collect money and never pay out, but in reality, they will have to pay out claims, because that financial security is the product they are selling.

In the case of Joe, he signed a policy after the insurance company assessed his level of risk and determined the "fair" premium he should pay in order to be covered in the event of an accident. He then is owed to be indemnified (compensated to restore loss) at least up to the level dictated in his policy.

Going forward from the accident however, Joe may see his rates increase. This is not a "punishment" per se, but is a re-assessment of his risk level given he had a recent accident. Over time, with no more incidents, his rates should return to a more normal level.

It seems like it would always be better to simply save money yourself, so that you can buy a new car in case there is an accident.

This is a concept known as Self Insurance and is a viable option for the wealthy, barring no legal requirement for insurance, which most states have for cars. However, the vast majority of people don't have the ability to save in that capacity. Property damage to one's own car is only a portion of the possible exposure, as you have to consider the other person's car, and possible medical bills of both parties (including any passengers). To put it in perspective, the minimum amount of insurance required for many states is around $25,000 (for just the other party's damages when you're at fault), while common policies can go upwards of $100,000 or more.

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    It also might well depend on the circumstances of the accident. For instance, if Joe drives his car into a wall, and the police arrest him for DUI, then it's a good bet his rate will go up substantially. If he just gets a moving violation, it might go up a bit (and the same is true even if he didn't wreck the car and make a claim). But if someone else hit him (e.g. rear-ended at a light) then it might well not change. As you say, it's all about the insurance company's assessment of Joe's risk.
    – jamesqf
    Oct 6 at 17:33
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    Even most states that require insurance, will allow you to 'self insure' by posting a bond for a required amount.
    – Glen Yates
    Oct 7 at 14:36
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    OTOH, some companies have the policy/idea of accident forgiveness, where 1 accident is overlooked. Sometimes this has a time limit, so if you don't have another accident in 5-10 years (or whatever), they will overlook another accident. And this is only if it's your fault. Your insurance doesn't raise your rates if the other person is at fault. So no, an insurance company may not actually raise rates if someone gets in an accident. Oct 7 at 20:03
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    Another option the insurance company has if you have too many claims is to decline to offer you a renewal when your policy is next set to expire.
    – Michael
    Oct 7 at 23:59
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    @gerrit I'm not sure about the US but because the liability component is the largest risk, the extra premium to insure against the the owner's loss is minimal. Say I own a car worth €500, and crash it into a brand new Ferrari - my insurance has to pay for a Ferrari, in comparison to which my own car is rounding error.
    – Chris H
    Oct 8 at 8:39
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You're missing a number of things. Last I knew, New Hampshire is the only state that does not require car insurance, that is if you can prove that you can pay for the damages you cause. Furthermore, driving without car insurance is illegal and has penalties ranging from fines to even jail time.

In addition, car insurance covers medical payments for you and your passengers as well as liability coverage for damage to the other driver’s property and medical injuries if you are at fault (up to the limits of your policy).

Your concern for being charged $50 more per month is misplaced.

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    Exactly. Hospital bills for people far exceed the cost of repairing or replacing a vehicle. They could easily rack up over $150k in medical bills for any surgery and physical therapy. Especially if there's multiple people involved. Oct 7 at 20:01
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    Virginia does not require insurance but requires payment of $500 "uninsured vehicle fee" along with annual registration if you don't. This makes it possible to get in a situation where there's nobody who's both liable and able to pay. Oct 7 at 20:02
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    This sounds unlikely. Of all the states in the world, only New Hampshire does not require insurance? I don't claim to know the situation in Argentina, Somalia, Eswatini, or Bougainville, but the claim in this answer seems very strong.
    – gerrit
    Oct 8 at 7:46
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    @gerrit: New Hampshire is a subdivision of the USA, the answer obviously does not cover other countries (which is the word an American would use instead of "states" to talk about Argentina etc.) Oct 8 at 11:10
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    @MichaelBorgwardt Other countries may also have subdivisions called states (Estados Unidos Mexicanos comes to mind)
    – gerrit
    Oct 8 at 11:42
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Self-insure when you can afford to do so (i.e., don't buy consumer warranties) because the money saved by not buying the extended warranty will be more than the expense of the few times where it could have helped.

But DON'T self-insure when a single hit can significantly impact your finances and/or make it impossible to replace the item, such as home insurance, auto liability, or comprehensive/collision insurance on a new(ish) car.

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  • Not sure about the final point; maybe I can't replace a €25,000 car, but maybe I can buy an old wreck or get around by bicycle + transit + occasional car rental. Full insurance on items you can't afford to replace is only needed if the item is essential (such as a home, which most people are required to insure due to mortgage rules anyway).
    – gerrit
    Oct 8 at 7:50
  • @gerrit if you're happy too, I suppose, then sure. I think most people wouldn't be if they were willing to spend $25K on a car to begin with.
    – David
    Oct 8 at 16:06
  • @gerrit: But even though I could replace a €25,000 car, I wouldn't have bought one in the first place :-) At least in the US, most people who buy cars in that price range take out loans, and as with mortgages, C&C insurance is required by the lender.
    – jamesqf
    Oct 8 at 16:42
  • You are correct that most people who buy cars in that range take out loans. (Heck, I'm sure that's even true for half the price.) But we have two very small kids and bought the family minivan new a couple years ago. Over $30K. We paid cash, and we have to cash to replace it if necessary, but you better believe that we got C&C insurance on it even without any lender requirement.
    – David
    Oct 10 at 21:52
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Possibly. It just depends on how the insurance company rates the insured and the nature of the claim.

But often a claim will result in a higher premium but there is no certainty either way.

Having insurance is not a license to be stupid because the insurance company is in the business to make a profit. One drawback to filing claims that the company finds to be questionable is that they may drop you at the next renewal rather than raise your rates.

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Actually, you can in effect be “punished” for making too many claims by seeing your premiums increase. In many countries, there is even a national risk scale based on driving history shared by all insurers. Depending on local regulations, insurers can also go as far as kick out some clients.

The more interesting thing is that even before getting into your first accident, the mere fact that you are insured might change your behavior and incite you to take more risk than you otherwise would have (that's related to the broader concept of moral hazard). Excess or deductible is one way to deal with that, as are risk scales that give you a “bonus” or reward after several years of driving without a claim.

This is actually a very general problem: Insurance always has an effect on the behavior of the policyholders and therefore their risk profile. Insurance contracts are designed to mitigate this. Insurance mandates and reinsurance or risk compensation schemes also help with this. This can work relatively well, especially if insurance is effectively mandatory, but it does sometimes result in a completely dysfunctional insurance market.

So you are right that many insurances that are advertised do not always make a lot of sense for individual consumers. Health or car insurance mostly do, because the risks can be very high and regulation ensures the premiums remain manageable without rewarding risky behavior (or at least not too much).

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  • The problem here is that you seem to assume that there inevitably will be a first accident, in which you're at fault.
    – jamesqf
    Oct 8 at 16:44
  • @jamesqf I am not sure I follow your logic. Where do I rely on that assumption?
    – Relaxed
    Oct 8 at 23:52
  • "... even before getting into your FIRST (emphasis mine) accident..."
    – jamesqf
    Oct 9 at 15:46
  • @jamesqf That sentence is precisely about what happens when you haven't had an accident, it doesn't assume an accident is inevitable, quite the opposite. I write “even before” to contrast it with the notion that you only get careless after having experienced a successful claim directly.
    – Relaxed
    Oct 10 at 15:47
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That heavily depends on the type of insurance and probably on the jurisdiction.

As you don't specify a location, I'll take Germany as an example.

Car liability insurances as well as "full car insurances" have a premium discount for lack of damages. The longer you are free of damages, the cheaper they get. If something happens, you lose part of or all the discount.

Other insurances don't have that, but can kick you out if you are too big a cost factor for them.

E. g., break your neighbour's lamp, then two other small things and have it all be covered with your private liability insurance. Then you might be out of luck if you injure someone with your bike which can be very expensive.

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    Car insurance in the UK is similar. The "no claims discount" increases over time and can be as high as 60% or more. Depending on the insurer You don't necessarily lose it for just one claim, but for a series of claims in a relatively short time. Note this applies to claims independently of who was at fault for the insurance claim.
    – alephzero
    Oct 7 at 3:11
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    @alephzero Since we're talking about UK motor insurance it's also worth mentioning no-claims discount protection - customers can choose to pay a higher premium and in return the insurer penalises them less for each claim they make.
    – user3490
    Oct 8 at 21:49
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"or some other kind of accident happens which "goes on the insurance"

Some types of accidents aren't a big deal because they were caused by other people and you have some kind of proof of that like a police report or the area of the car damaged indicates somebody else did it (like major rear end damage). Your rate won't go up in those cases. Even if the other party isn't insured your state or insurance company will go after them for the money. For example I was in a long line of cars that had a chain reaction accident caused by a drunk driver. That drunk didn't have insurance but the state sued them for the money to pay the insurance companies for the damages. So eventually the insurance company can get back some of the loss that way in many cases. And keep in mind also that the insurance company has also priced their services based on the area where the insured lives and drives so they know the risks of things like car theft in that area and they make sure to collect enough money from everybody in that area to cover it. The point is that the insurance company doesn't always need to raise rates.

Now if you cause an accident you would be wise to pay for it out of your own pocket instead of reporting it, whenever possible.

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    Not reporting an accident to your insurance is almost always a breach of your policy, and may result in any future claims being denied. Be very, very careful with that.
    – throx
    Oct 7 at 3:35
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    @throx That seems to be jurisdiction-dependent. In Germany, the car liability insurance tells you on every bill the threshold under which it is cheaper to pay it on your own. You must only report it if you want them to pay for it.
    – glglgl
    Oct 7 at 9:17
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    @throx "any future claims" regarding that accident, yes. I'm yet to see a policy which would deny "any future claims" on an unrelated accident which I do report. Oct 7 at 13:28
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Most car insurance companies will punish clients which file many claims. They may phrase it as "reward programs" for safe driving but it's the same in the end: people who have more accidents end up paying more. In some countries, such reward/penalty schemes are even mandated by the law.

For this reason it may sometimes be wise to fix minor accidents without using your insurance: if you crack a headlight, you might be better off paying $300 to get it replaced out of your own pocket rather than making your insurance pay for it. If the insurance increases your premium by $50 for a year (because you lose your "safe driving bonus"), you will pay $600 in the end.

You still need insurance in case you hit a pedestrian and are on the hook for paying up their medical bills. No amount of missed insurance bonuses will compensate for the amount of money your insurance might have to pay for you.

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    In my experience, the "safe driving" benefit is usually based on getting too many traffic tickets, not on damage claims like this.
    – Barmar
    Oct 7 at 16:20
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    @Barmar You have a rather unusual experience. In the UK, you have a no-claims bonus: After your first year on full premium, your 2nd year gets a substantial reduction (because of no-claims). 3rd year even more. If you ever make a claim, you lose the bonus and go back to full premium. Oct 8 at 7:49
  • Your hypothetical situation with the headlight seems pretty outlandish to me. While I might agree with you that it could be worth it to fix minor damage out of pocket it seems incredibly unlikely that your premium would rise that much based on a single minor claim. If it was part of a pattern of claims that show you to be a high risk client then maybe, but if my insurance increased by $600 per year because of replacing a cracked headlight I would just find a different insurance company
    – Kevin
    Oct 8 at 17:46
  • Raising rates due to an accident is not punishment, it is simply a re-evaluation of your statistical risk of getting into future accidents. It's one of many factors - age, traffic tickets, where you live, &c - that insurance companies use in setting rates. (And $300 to replace a headlight? What the heck are you driving, a Rolls Royce?)
    – jamesqf
    Oct 9 at 15:52
  • @jamesqf Of course, I mean "punish" figuratively. And yes, according to Google "the average cost of replacing a headlight assembly ranges from $250 to $700" in the US for common cars, and around $1500 for a Rolls Royce. I wonder what car you have if it was so much cheaper for you. Oct 10 at 1:40
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Many good answers already, but I'll touch on some points which I don't see mentioned.

  • Insurance is only about unpredictable accidents. If they can prove you set the whole thing up and did deliberate damage, then that's called an "insurance fraud" and there's jail time to go with that.
  • Even without deliberately causing damage you could still be reckless and insurance policies usually have some clauses that allow them not to pay out in such cases. This is, of course, a slippery slope since "reckless" can be a subjective thing and there have been cases where an insurance company abuses this clause. In general though it's fairly rare.
  • If you do play honestly however, your insurance rate usually doesn't go up after a single accident, although the insurance companies do reserve the right to change it at any time for any reason. And they are quite likely to if you have multiple accidents in a short amount of time (meaning that they got something wrong when they estimated your risks).
  • All in all it's a number game for the company. As long as it estimates the risks correctly and charges just a bit more, it will always come out on top regardless in the long run.
  • As for whether or not to get insurance - that's a difficult question. Someone will have to pay if an accident happens. Can you afford it? Do you want to risk it? In the end, you can't insure everything in your life, so you'll have to take some risks. Which ones? It's clear that on average people would be better off without insurance... but that's only on average. If you happen to get unlucky, an insurance policy might actually turn out to be a lifesaver. Nobody can predict the future, not even insurance companies, so it's up to you to decide what to insure and what to risk in your own personal life.
  • Different insurance companies can charge significantly different rates for the same insurance, so it can pay off to go around shopping. But be careful, because the devil's in the details. All of the following and more will affect the price: What risks are covered; how big the pay-out will be; what are the exceptions; how they estimate your risks; what the competition looks like; how likely they are to pay out (some companies offer dirt cheap insurance but then fight tooth and nail when it comes to paying up, others do the opposite); etc.

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