Insurance: The Imposition of Persistency Discount - Term Paper Example

Bill The concept of persistency discount exist in Proposition 103 as per which the auto insurers are suppose to determine the insurance rates based upon fundamental factors which includes the price of the vehicle, its mileage and credentials of customer particularly driving experience and record. The persistency factor is among the 16 optional factors which determine the insurance rate. The persistency discount is actually an appreciation amount by the insurer to the vehicle owner due to his long affiliation with the insurance firm. The persistency discount was offered to the old customers aligned with the legislations of Department of Insurance. The population of Californian state have jointly recommended that the favour under persistency discount shall be offered to all the owners of all the insured vehicles. The persistency discount was additional favour towards the old customers; however the residents have claimed that they should be entitled for this persistency discount as well. It is debated that persistency discount was a trap, if the customer has to secure this benefit than the customer has to commit its long-term affiliation with the insurer. Thus persistency discount offered unconditional guarantee to the insurer about their customer loyalty. The residents have challenged such policy, and has stressed that this is against the notion of free and transparent competitive market. Against It is however warned that the imposition of persistency discount will offer financial benefit to the owner, but will also put the owner under certain financial and legal constraints. It is warned that persistency discount amendment will be responsible for inclusion of other obligations and penalties towards the owner which presently have been ignored. The critics have cautioned that persistency discount will put the owner in web of other charges in form of automobile insurance, penalty for accidents - irrespective of their fault; the concerns are specifically valid for motorists. It is further warned that persistency discount might be an expensive discount for the vehicle owner; particularly those who have taken driving break of minimum three months, and will probably end up paying more amounts for re-registration of their dormant case. Furthermore, the critics have warned that implementation of persistency discount for new customer will give undue advantages to the insurance firms. It will give them the right to increase the insurance rates - and this increase might be significant for family who is currently under strong economic crunch due to global recession. A chain of events have been idealised by the critics, who warn that implementation of persistency discount for new customers will increase the premium charges and other additional expenses particularly if the driver turns dormant. The increase in insurance rates will naturally develop reluctance among the low and middle class vehicle owners, and therefore there will be increase in the number of uninsured vehicles on road. The increase in the number of uninsured cars will affect the business of insurance companies, and therefore insurance companies will increase their premium charges from the registered vehicle owners. Eventually, the insured vehicle owner will end-up paying more insurance amount, and at parallel the uninsured vehicle owner has potential of heavy financial loss in case of accident. Critics warned that the demand for persistency discount for new customers will jeopardize the insurance business and the interest of vehicle owner. The contents of Continuous Coverage Auto Insurance Discount Act are suspected to be dubious. It is warned that this act will provide insurance firms with legal cover to disown the customer upon filing claim. For The proposal has been supported by those who echo the concept of free and competitive market. The act is an attempt to develop competition among the insurance companies. This proposal shall provide vehicle owner to pick the smart deal. It is also claimed the supporters of the act that the proposal provide necessary rights to the customers. Beside persistency discount, the legislation has emphasised upon others benefits for the customer. The legislation covered important factor of insurance company changeover, if the customer wants to change their insurance firm, then the length of insurance period will automatically transfer to the new firm, and the firm shall be under compulsion to offer discount and low price to the new customer. It has been confirmed by the Legislative Analyst Office that the proposal will reduce the insurance premium, but the impact shall be minimum. The vocalist in the favour of the proposal has stressed upon the important feature of the bill which transfers the length of insurance period from one company to another. This will protect the customer from high premium charges, and will put him under no premium in case of an accident by the new insurance company. The premium calculated by the insurance companies is based upon the length of insurance, number of accidents and amount of registered claims. The lesser insurance period, increased number of accidents and claims will increase the premium. Through this bill, the length of insurance period is transferable, thus in case of accident the customer registered at new insurance company will gain from the transferable length scheme and will probably have to pay less premium technically. On the other side, the insurance companies will be cautious about their customer affiliation, and will try their utmost to gain their customer loyalty. If customer has the benefit of low premium even after changeover of insurance company, then probably the major concern of customer about the high premium has been taken care off - and there is strong possibility of customer making smart choices if dissatisfied. Once the customer realise their right of options then this is an alarm for the insurance companies. These companies will definitely work for the retention of their old customers, and will try to attract the new ones. The companies have to focus upon the revival of their marketing strategies, and have to attract new customers. This competitive insurance market will then result in economic insurance packages, and eventually the customers will benefit. Competitive market exists in banking industry, and it has been the legislations by the government which has generated competition in the banking industry. The customers related to the banking industry have been offered incentives and supports - and once the customers realise their worth and influence only then the market manoeuvres towards growth and development. The legislation will lead to growth and expansion within insurance sector, and is expected to bring more investment. More investment means more investment firms, which means more auto-insurance schemes, which means more economic choices for the vehicle owners. The proposal is an attempt to keep the stake of vehicle owner protected. Recommendation I would personally suggest that the proposal itself is not significant attempt to offer financial incentive to the customer. It is a fact that customers will have options and the momentum of investment will increase significantly - but all these benefits are long-term. I would recommend that legislators shall review the profits of the insurance companies and should either incorporate additional taxes under the title of social benefit scheme. It is common perception that insurance firms are extractors of wealth and have never been a helping hand. The huge quantum of profits by the insurance firms is an irony - and it is the responsibility of the government to intervene on fair grounds. With reference to this proposal, the premium percentages shall be related directly to the insurance period i.e. old vehicle owners should pay low premium in case of accidental events. It is also recommended that after certain period, the insurance company should be obliged to provide premium which independent of accidental expenses. The insurance companies have to facilitate their customers rather than getting facilitated by the customer. Insurance is the sole business where the customer is personally involved in taking preventive measures to protect insurance agencies from revenue short-falls; the customer works cautiously to avoid accidents and pay premium at the same time. This business is based upon heavy risk assessment, and therefore the investor shall be rewarded for the risk undertaken. It is also recommended that premium percentage shall be related to the banking interest rates or inflation. This will provide relief to the customer in case of loss. It is also recommended that registration and application charges for the old registered vehicle owners switching to the new insurance company shall be dropped. It is also filing period shall be incorporated in this act; the government should make insurance agencies liable to settle claim within shortest possible time - and in case the settlement takes more than decided time, the insurance company should proceed with the payment filed by the customer and the state shall act as a guarantor. This state shall further incorporate the law, and should have access to the property and bank accounts of the customer. The voters should vote in the favour on this proposal; however the voters shall encourage the state to offer better incentives. The critics are justified in their opposition towards friendly legislations by the state government. The insurance companies have been able to secure fortune irrespective of the fact that whether its registered customers are at loss or win. The revision of the proposal is therefore essential prior to its implementation. Reference 1. Deepti Bhaskaran. A Cover Is A Click Away. Money Magazine. August 2008. Outlook Publishing. Vol. 7, No. 16. pp. 30-32 Read More