Car insurance

I insure two cars. They are old - one 10 years, the other 14 years.  I am a cheapskate when it comes to cars. My guess is in aggregate their market value is $5000-$6000.  The insurance premium I have been paying each year for both is around $750 per car and there is an excess on claims of $650 on each.  I pay $750 annually to insure a car whose replacement value net of excess I would have to pay of about $2100 plus, to be fair,  I get comprehensive cover if I damage  another car.  The value of the comprehensive cover is about $250 per car (I priced this as a stand-alone policy) so that for the actual cover on each vehicle costs me $500 for a value of a written-off vehicle of excess of $2100.  This charge seemed outrageous to me and I even felt foolish for allowing this situation to develop.

I have been insured with the firm for 25 years and have never made a claim - all the costs above are discounted to reflect this.  After a long discussion with one of the insurer's representatives I found that about $150 of this charge was connected to the fact that one of the cars had initially been purchased with "finance". This adds a $300 premium to the total bill.  I had failed to notify the insurer that the financing had ended 9 years ago and a finger was wagged at me for my failure! I had no idea I was being levied a surcharge for this.

Eventually I did the obvious thing and took out a policy giving me comprehensive insurance cover only.  If either car is damaged beyond repair or stolen I will write it off.   My premium total dropped from $1500 to $550 a saving of $950 annually.  For this I gave up cover on the two vehicles insured of $4200.  Happy with that exchange.

My lifetime experience of insurance companies has been unfavourable.  On this occasion I have to say my own stupidity in not demanding a detailed accounting of costs in years past irritates almost as much as the over-charging. 

Pension reform

The reforms on eligibility for the pension that Labor opposes seem sensible to me, The current eligibility for a part pension (for a couple) is $1.15m in assets whereas under the proposed Coalition-cum-Green  reform this is reduced to $823,000.

Suppose couples want to leave no bequests and that they own a house worth $650,000. Suppose also they retiree at age 65 and know they will live for 25 years to age 90.

The big factor determining their sustainable income is the rate of return on their assets and whether they can engineer a reverse mortgage on their house that yields this rate of return.

Suppose their assets earn a paltry 2% annually real return. Someone just on the old current eligibility limit (without a home) can spend $58,903 annually over the 25 years (or $92,102 if you include the reverse mortgage). With the lower eligibility requirement they can spend $42,154 annually (or $75,448 with the reverse mortgage).

More realistically suppose returns of 5% annually on the investments.  Under the old limit they can (without a home) get income of $81,538 annually (or $127,715 with the reverse mortgage).  Under the lower eligibility requirement they can get $58,393 annually (or $104,000 with the reverse mortgage).

I have used simple annuity formulae* to do these calculations.  The basic idea is that you can draw down the value of assets and draw interest on residual asset values until they hit value zero at age 90.  The Labor Party it seems to me in opposing the Coalition reforms is supporting people who don't really need it.  Of course they want it but it isn't an imperative.

With a bit more effort I could allow for bequests and longevity risk but these will change these calculations in a straightforward way.   Bequests anyway are irrelevant in a situation where you are trying to compute eligibility for basic pension entitlements. Notice too how critically the value of the family home enters these calculations.  Excluding the family home from these asset tests  does not seem defensible if the opportunity to purchase reverse mortgages is available.

(*) It is a while since I have done these financial mathematics but the equation I used is that the sustainable income X * annuity formula given interest rates r and time horizon n, namely a(r,n),  must equal the initially value of the capital asset V so X =V/a(r,n).  I think that's right. 

Congestion pricing & Infrastructure Australia

I have been glancing through the 3-part report by Infrastructure Australia (a summary here) on Australia's infrastructure needs over coming decades.  I was mainly interested in the transport sector and proposals that looked - on casual reading of the press this morning - like yet another case for user charges (congestion charging and heavy vehicle charging for road damage costs).  As I started working on these issues more than 20 years ago I do get a little peeved by the almost annual attempt to revive such discussions somewhere which always get promptly forgotten.

On this occasion I can only say I am underwhelmed by the stupidity of the Infrastructure Australia analysis.  They still don't understand the basics of user-charging. Nor for that matter did Ian Harper in his recent reported proposals for competition reform.

Infrastructure Australia take as given Australia's dismal future population trend forecasts (fair enough not their concern, but in my view the forecast rates of population growth via our migration program are unacceptably high) and then look for ways of dealing with the surge in congestion and heavy vehicle demands that will result.  Their answer?  Build more roads everywhere and find ways of funding such investments.  Their answer?  Road use charges that fund the roads. 

That fundamentally misrepresents the intent of user charges. Unless these prices target congestion and road damage costs this won't ensure efficiency.  Indeed the issue is not primarily one of funding at all.  All roads - new and old alike - that are subject to external costs should be priced to eliminate the external costs imposed on them (congestion and road damagers) so that all roads are utilised efficiently.  Then if the roads make a profit expand their scale thereby making expansion decisions that reflect demands at the socially correct price.

Its the same old dumb-assed "engineer think" that has dominated Australian road infrastructure planning for decades.  It is a shame that they cannot get the basic logic right.


http://www.infrastructureaustralia.gov.au/news-media/media-releases/2015/2015_05_22.aspx