Warranty wonders

[seventythree]

Originally Posted by z12358

MNBoxster:
"It is simply insurance by another name, and as such, is predicated on the fact that fewer people will make claims than those actually taking out the warranty."

Jim, I agree with you and bnorman but the answer is not absolute and needs to be analyzed on a case by case basis. Extending the argument to all insurance is a bit more complicated as both the AVERAGE and the VARIANCE of the random outcomes need to be considered. Sometimes it "pays" to buy insurance when the volatility (variance) of the unknown outcomes becomes too large. For instance, let's assume that the average annual house insurance claim is $1000 (per house per year) and the average annual house insurance premium is $1500 (per house per year) -- just inventing numbers here. The insurance company is making $500 (per house per year) profit. However, imagine that the volatility (variance) of the claims is such that $300,000 claims are still very likely every year (even though the average is still only $1000). Paying the extra $500 per year to GUARANTEE that you will never be losing $300,000 is not a bad idea in this case -- even if you had the $300,000 saved in a 'catastrophic loss' account.

Now the $500 (33% profit margin) may be excessive but that's really a question on how free the market is and how much competition is allowed in the insurance business. More competition would cut that margin down, of course.

My point is that when the volatility becomes much larger than the mean (average) of a random process, and especially when it becomes comparable to someone's net worth (or even larger), then it's worth paying a premuim over the 'cost' premium to avoid it.

Z.

Z,
Tell me if you agree with the way I re-iterate your argument:

If the $6~8K repair bill most Boxster owners are concerned about, in the case of a complete engine replacement for example, represents a significant portion of the owner's net worth, then buying breakdown insurance makes good sense. Otherwise, self insuring is the way to go.

Net worth = $100K, buy extended coverage
Net worth = $1M, self insure

Regards

[z12358]

Originally Posted by seventythree

Z,
Tell me if you agree with the way I re-iterate your argument:

If the $6~8K repair bill most Boxster owners are concerned about, in the case of a complete engine replacement for example, represents a significant portion of the owner's net worth, then buying breakdown insurance makes good sense. Otherwise, self insuring is the way to go.

Net worth = $100K, buy extended coverage
Net worth = $1M, self insure

Regards

Close re-iteration, except it's missing the part where the VOLATILITY (range) of the random process is compared to its AVERAGE (which approx equals the annual premium minus the insurer's profit margin). If the average is much smaller than the volatility (i.e. premium is low enough) it may be better for both (net worth) cases to just buy the insurance. If the average is comparable to the volatility (i.e. premium is comparable to the worst case scenario) then it may be better for both to just self-insure as they will both be able to invest the premium into a "worst case" account and be able to cover the worst case scenario themselves.

But to answer your question -- and without getting into issues like liquid vs. non-liquid assets, utility functions, risk of ruin, etc. -- the richer guy should be able to self-insure much easier than the other guy, so your final conclusion seem to be correct but not at ANY price (premium), of course.

Z.

[wetstuff]

I did a lot of searching when the P-warranty was about to expire on a 01 Boxster-S I bought a couple of years ago. I looked at most third-party warranty companies before I came up with one that is only sold thru Credit Unions.

It's InterContinental Warranty Svcs. They had a variety of terms: I chose 5yr/80k (Ha!..I'm at 21k) I forget the big insurance company behind them, but the reason I opened an account at the MD State Employees (slackers..) CU is that I got the Guaranteed Price Refund rider which means: of the $1920 I paid - I get like $1800 back if I don't use it. ...They may only write cars that are still under factory cover. Mine had about 30days left.

We may sell the car, so I'll either pocket the warranty...or pull it out to close the deal. Cash-back doesn't transfer but the basics of the policy do.

Given the general long term quality of our cars and my limited useage - it's probably not statistically needed. That's why cash-back was especially attractive.

j i m