I only see bad losses for Nationwide in the future, given the inability to rate for driver type, activity, etc. This program makes me scratch my head as I learned in business school that more variables in a quantitative model will allow one to become more accurate in a forecast…How does only basing it on vehicle type make it more accurate? This think tank may have contracts with some non-standard carriers as I have heard from an agent here in IL that the program also offers full coverage…and that scares me as an insurance professional if you are giving “free” insurance to high-risk drivers…I expect Nationwide to have a high combined ratio after the 1st 2 quarters. I am glad I am a Toyota owner.
Well, I don’t want to discount this as a bad idea immediately, but there are definitely some question marks:
First of all, is VW going to be designated as the official payor on the policy? Will there be a payor change after the first year? Is the driver or VW the owner? If the driver is, what if he/she refuses to do the payor change? Will VW simply let the policy lapse? Wouldn’t that then contradict with its goal of selling cars and having a customer base of good, loyal drivers? Also, aren’t the good drivers subsidizing the bad ones here? Do you know if they treated these VW purchaser as a “group,” hence not having to jack up the price for the good drivers (compared with had they bought individual policies)?
I would expect the poorer drivers among the purchasers will find they can’t afford the vehicle or the insurance after the free year of insurance is up. This isn’t a problem for VW, who has their money, and doesn’t need to worry about surcharges for the subsequnet policy periods, or for Nationwide, who will have the opportunity to underwrite the risks at renewal.
The vehicle purchase screening may function similarly to credit score, in that those with better credit are more able to finance the vehicle.
Besides “Free” insurance being illegal in Florida, The other problem is that it is not FREE, they pad the cost into the purchase price, If I trade in a car and I already have insurance I bet I get a better deal on the car. AIN’T NOTHING IN LIFE FREE, but the young saps that get to buy a new car and not pay for insurance for the first year have not figured that out yet. actually if they are not on a zero % loan they will be financing the premium for 3-5 years. HA what a deal
The younger or higher risk drivers think they are getting a deal because they are getting free insurance for 1 year, and after that year they try to get their own insurance, and the rate is so high, they can’t afford it. They might be forced to sell the vehicle, and if they are upside down on the loan they are now in a pickle.
Secondly, I want to disagree with John.
They “might” include the insurance in the purchase price of the vehicle, but if you look at the sticker price of the vehicle before you buy, you would know if they are trying to increase the price of the vehicle with the insurance. Insurance varies greatly from person to person, and since VW is just looking at the vehicle themselves, and the age/sex/marital status/driving record is not looked at when they give this “free insurance” they may very well come out behind on this as well, because since they aren’t charging for the insurance, they cannot get more premium for higher risk drivers.
Regardless, it’s good and bad at the same time. Good, because VW will get more sales in the short term. Bad, because there most definitely will be buyers that won’t be able to afford the insurance after the year of insurance, and might be dissatisfied with VW since they cannot keep the vehicle after that.
I guess we’ll see what happens when that 1 year is up.
Are they meeting only financial responsibility limits or are they offering higher limits? Foolish is the homeowner who buys a car with only minimum limits available. Their teenager is out driving around with the family’s house riding on their responsible behavior as a driver.
The cost of the car will certainly be adjusted to absorb the cost of the program. The sticker from the factory will already reflect the increase. The cost of the program will be absorbed in sales of VWs across the country, not simply within the program states. A minor adjustment to the pricing spread over thousands of vehicles will not be that apparent.
As for young or irresponsible drivers being unable to afford the second year premium, I suppose this will put VW owners where they belong – squarely in the ranks of the morally hazardous.
With hundreds of VWs vanishing, being destroyed by hit-and-run motorists, developing wiring issues leading to all consuming fires, consumer advocacy investigations, trail lawyer seminars, all contributing to a general boost to the economy, it would appear that this is an idea a politically savy State Attorney General screams for. ;-}
The previous posts have some good points. Although I have never worked in personal auto, I have some experience with multivariate models applied to insurance, and I believe I can explain the conditions under which Nationwide will and won’t profit from this. However, I don’t claim to be an expert in this area.
If Nationwide (or their consulting company) are simply only looking at one variable, the loss history associated with the model of car, and plan to charge rates based only upon the loss history of the model, they are likely to lose money. As the other posts have pointed out, younger, higher risks drivers are likely to gravitate to Volkswagen.
However, here is one possibility. Assume, for simplicity, that only two factors affect losses – age and car model. A multivariate model is estimated where losses are a function of those 2 variables:
L=F(Age, CarModel). The model is able to isolate the effect that both Age and CarModel have on losses.
Nationwide knows that the average age of the driver will change, but is confident that they have isolated the effect of CarModel. Moreover, Nationwide assumes that they can accurately estimate what the new age distribution will be. Using the effect that the car model has on losses from the multivariate model and the estimated age distribution, Nationwide is now able to successfully price this new Volkswagen program AS A POOL and charges enough to make a profit.
Another possibility is that Nationwide knows that they will lose money during the first year of the program. However, after the first year, they plan on dropping the bad risks and keeping the good ones. Many of these good drivers may not have even considered Nationwide if they had not been drawn in by Volkswagen’s promotion. Since we are dealing with a pool of mostly young people, if the drivers that are not dropped stay with Nationwide, they may enjoy many of years of profitable business from them. From Nationwide’s perspective, they would hope that they would make enough money off of the good drivers in years 2,3,4…etc to more than make up for the money that they lost in year 1.
Now comes the issue of credit risk. Some of the previous posts have raised the issue the some of the buyer’s under this program may get dropped after the first year an might become unable to pay for insurance. This, in turn, could prevent them from driving, which may diminish their desire or ability to make car payments. This may be a problem for the lenders, and it may be wise for them to tighten their lending standards on Volkswagens to avoid this problem. However, Nationwide will have no exposure to this risk (unless they are also providing the auto loans), and it will probably not effect their behavior or profitability.
It will never last, as a not so young driver, I have enough life experience to be able to figure out it is not free, and that if I purchased a VW, I would be subsidizing the higher risk drivers (younger) that gravitated toward this incredible rip-off. If you consider that an 18 year old will most likely pay more in insurance premiums than he does on a car payment, it will not take long to see that the $500 car payment which he can’t afford now will become $700. Lets assume the insurance is $500 a month (average for a youthful driver on an average model new car) the car loan will actually incorporate the financing of that first(free) year of insurance into the loan, there by financing one year of insurance over 36-60 months, thus lowering the additional month payment. The problem is that in years 2,3,4 and 5 the driver is now paying for insurance on there own and also still paying for the free year that is included in the car payment. Nationwide is NOT doing this gratis and they are being paid well by VW for this new fangled scheme. Nationwide would be fullish to price this model expecting to lose the first year and make up for it on renewals, they will never be able to capture enough business from young drivers to make it. I expect the average cost of a new VW just went up $2500. As a consumer I would not want to be insured by a company that makes that big of a gamble on young drivers, unless the cost is actually higher. How do we find out what Nationwide is actually charging VW for this freebie. Do I have options on coverage or do I just get the statutory minimums, what deductible are shoved at me? there is alot on questions that are not able to be answered yet.
Rather than having insurance be a sold through licensed professionals, it becomes a freebee used to sell other products.
I cannot comprehend how anyone could not see this as “Unfair trade practice.” Bottom line, if some guy goes to buy a V.W. Does another agent have any chance to write him? Clearly the department has given a dealership an unfair advantage.
The insurance company is selling V.W. insurance at a reduced rate in order to buy a volume of business and get a chance at the renewal.
As an owner of an insurance agency that sells auto insurance, I would be terrified save for the realization that this gimmick will fail.
RECENTLY MY CAR WAS HIT BY ONE OF THE PEOPLE YOU INSURE IN AUGUSTA GA. MY CAR HAS BEEN IN THE SHOP SINCE 4/01/2007 TODAY IS 4/19/2007 I HAVE BEEN IN A RENTAL CAR SINCE THIS ACCIDENT HAPPENED.ON 4/16/2006 ENTERPRISE RENTAL CAR ADVISED ME I WAS ONLY COVERED IN THE CAR UNTIL 4/19/2007 BECAUSE THE AJUSTER WOULD HAVE TO TELL THEM I NEED THE CAR LONGER BECAUSE MY CAR WOULD NOT BE READY UNTIL 4/28/07 WHEN I TRIED TO NOTIFY MR. WADE TAYLOR HE DID NOT CALL ME BACK I FINALLY GOT IN TOUCH WITH HIM ON 4/19/2007 I TOLD HIM WHAT AUGUSTA TAYLOR TOYOTA SAID ABOUT MY CAR I ALSO TOLD HIM WHAT ENTERPRISE SAID ABOUT HIM CONTACTING THEM . MR. TAYLOR WAS NOT CONCERNED ABOUT MY ISSUES AND HIS ATTITUDE WAS VERY NASTY FIRST HE ADRESSED ME AS Mrs. HOLLOWAY BUT AS HIS VOICE CHANGED HE SAID REMONA THERE IS NOTHING THAT I CAN DO RIGHT NOW UNTIL I TALK TO TOYOTA OF AUGUSTA!! IN A VERY NASTY TONE HE SAID HE FELT TOYOTA OF AUGUSTA HAD HAD THE CAR TO LONG AND SHOULD BE PAYING FOR SOME OF MY RENTAL. I HAVE HAD NO PROBLEMS UNTIL NOW. I DO NOT FEEL THAT MR, TAYLOR SHOULD HAVE TALKED TO ME THE WAY HE DID I ALSO FEEL WHAT EVER THE PROBLEM BETWWEN YOUR INSURANCE COMPANY AND AUGUSTA TOYOTA HAS I SHOULD NOT HAVE NOT BEEN ADDRESSED WITH IT! AND AFTER TALKING TO MR.WADE TAYLOR ABOUT THE RENTAL HE DID NOT EVEN CALL ME BACK TO LET ME KNOW IF I WAS TO KEEP THE RENTAL OR RETURN IT I ENDED UP HAVING TO GO TO ENERPRISE MYSELF. I HAVE BEEN VERY PATIENT WHILE MY CAR IS BEING FIXED BUT I ALSO FEEL I HAVE BEEN DISRESPECTED FOR NO REASON BECAUSE I HAVE NO CONTROL OVER HOW LONG IT TAKES SOMEONE TO FIX MY CAR. THANK YOU VERY MUCH FOR YOUR CONCERNS.
I just recieved an email notification that REMONA HOLLOWAY had commented on the difficult time she was having with the insurance company.I am sorry to hear that, and I hope she is able to get her car fixed quickly.
I cant help but notice that I have not heard of any other car companies joining V.W. in this folly, and I still say my original comment:
\”As an owner of an insurance agency that sells auto insurance, I would be terrified save for the realization that this gimmick will fail.\”
Seems to be holding true.
This was a bad idea on many different grounds, but the biggest problem was that it removed risk factor from the rating process. This concept gives the largest rebate to the youngest or highest risk drivers, therefore it will attract the worst risks driving up the cost of the car.
It also put young people into cars that they might not be able to afford when they had to pay for their own insurance.
I only see bad losses for Nationwide in the future, given the inability to rate for driver type, activity, etc. This program makes me scratch my head as I learned in business school that more variables in a quantitative model will allow one to become more accurate in a forecast…How does only basing it on vehicle type make it more accurate? This think tank may have contracts with some non-standard carriers as I have heard from an agent here in IL that the program also offers full coverage…and that scares me as an insurance professional if you are giving “free” insurance to high-risk drivers…I expect Nationwide to have a high combined ratio after the 1st 2 quarters. I am glad I am a Toyota owner.
Well, I don’t want to discount this as a bad idea immediately, but there are definitely some question marks:
First of all, is VW going to be designated as the official payor on the policy? Will there be a payor change after the first year? Is the driver or VW the owner? If the driver is, what if he/she refuses to do the payor change? Will VW simply let the policy lapse? Wouldn’t that then contradict with its goal of selling cars and having a customer base of good, loyal drivers? Also, aren’t the good drivers subsidizing the bad ones here? Do you know if they treated these VW purchaser as a “group,” hence not having to jack up the price for the good drivers (compared with had they bought individual policies)?
I would expect the poorer drivers among the purchasers will find they can’t afford the vehicle or the insurance after the free year of insurance is up. This isn’t a problem for VW, who has their money, and doesn’t need to worry about surcharges for the subsequnet policy periods, or for Nationwide, who will have the opportunity to underwrite the risks at renewal.
The vehicle purchase screening may function similarly to credit score, in that those with better credit are more able to finance the vehicle.
Besides “Free” insurance being illegal in Florida, The other problem is that it is not FREE, they pad the cost into the purchase price, If I trade in a car and I already have insurance I bet I get a better deal on the car. AIN’T NOTHING IN LIFE FREE, but the young saps that get to buy a new car and not pay for insurance for the first year have not figured that out yet. actually if they are not on a zero % loan they will be financing the premium for 3-5 years. HA what a deal
First of all I want to agree with ChrisC.
The younger or higher risk drivers think they are getting a deal because they are getting free insurance for 1 year, and after that year they try to get their own insurance, and the rate is so high, they can’t afford it. They might be forced to sell the vehicle, and if they are upside down on the loan they are now in a pickle.
Secondly, I want to disagree with John.
They “might” include the insurance in the purchase price of the vehicle, but if you look at the sticker price of the vehicle before you buy, you would know if they are trying to increase the price of the vehicle with the insurance. Insurance varies greatly from person to person, and since VW is just looking at the vehicle themselves, and the age/sex/marital status/driving record is not looked at when they give this “free insurance” they may very well come out behind on this as well, because since they aren’t charging for the insurance, they cannot get more premium for higher risk drivers.
Regardless, it’s good and bad at the same time. Good, because VW will get more sales in the short term. Bad, because there most definitely will be buyers that won’t be able to afford the insurance after the year of insurance, and might be dissatisfied with VW since they cannot keep the vehicle after that.
I guess we’ll see what happens when that 1 year is up.
Are they meeting only financial responsibility limits or are they offering higher limits? Foolish is the homeowner who buys a car with only minimum limits available. Their teenager is out driving around with the family’s house riding on their responsible behavior as a driver.
The cost of the car will certainly be adjusted to absorb the cost of the program. The sticker from the factory will already reflect the increase. The cost of the program will be absorbed in sales of VWs across the country, not simply within the program states. A minor adjustment to the pricing spread over thousands of vehicles will not be that apparent.
As for young or irresponsible drivers being unable to afford the second year premium, I suppose this will put VW owners where they belong – squarely in the ranks of the morally hazardous.
With hundreds of VWs vanishing, being destroyed by hit-and-run motorists, developing wiring issues leading to all consuming fires, consumer advocacy investigations, trail lawyer seminars, all contributing to a general boost to the economy, it would appear that this is an idea a politically savy State Attorney General screams for. ;-}
The previous posts have some good points. Although I have never worked in personal auto, I have some experience with multivariate models applied to insurance, and I believe I can explain the conditions under which Nationwide will and won’t profit from this. However, I don’t claim to be an expert in this area.
If Nationwide (or their consulting company) are simply only looking at one variable, the loss history associated with the model of car, and plan to charge rates based only upon the loss history of the model, they are likely to lose money. As the other posts have pointed out, younger, higher risks drivers are likely to gravitate to Volkswagen.
However, here is one possibility. Assume, for simplicity, that only two factors affect losses – age and car model. A multivariate model is estimated where losses are a function of those 2 variables:
L=F(Age, CarModel). The model is able to isolate the effect that both Age and CarModel have on losses.
Nationwide knows that the average age of the driver will change, but is confident that they have isolated the effect of CarModel. Moreover, Nationwide assumes that they can accurately estimate what the new age distribution will be. Using the effect that the car model has on losses from the multivariate model and the estimated age distribution, Nationwide is now able to successfully price this new Volkswagen program AS A POOL and charges enough to make a profit.
Another possibility is that Nationwide knows that they will lose money during the first year of the program. However, after the first year, they plan on dropping the bad risks and keeping the good ones. Many of these good drivers may not have even considered Nationwide if they had not been drawn in by Volkswagen’s promotion. Since we are dealing with a pool of mostly young people, if the drivers that are not dropped stay with Nationwide, they may enjoy many of years of profitable business from them. From Nationwide’s perspective, they would hope that they would make enough money off of the good drivers in years 2,3,4…etc to more than make up for the money that they lost in year 1.
Now comes the issue of credit risk. Some of the previous posts have raised the issue the some of the buyer’s under this program may get dropped after the first year an might become unable to pay for insurance. This, in turn, could prevent them from driving, which may diminish their desire or ability to make car payments. This may be a problem for the lenders, and it may be wise for them to tighten their lending standards on Volkswagens to avoid this problem. However, Nationwide will have no exposure to this risk (unless they are also providing the auto loans), and it will probably not effect their behavior or profitability.
I love seeing young people get ript off.
It will never last, as a not so young driver, I have enough life experience to be able to figure out it is not free, and that if I purchased a VW, I would be subsidizing the higher risk drivers (younger) that gravitated toward this incredible rip-off. If you consider that an 18 year old will most likely pay more in insurance premiums than he does on a car payment, it will not take long to see that the $500 car payment which he can’t afford now will become $700. Lets assume the insurance is $500 a month (average for a youthful driver on an average model new car) the car loan will actually incorporate the financing of that first(free) year of insurance into the loan, there by financing one year of insurance over 36-60 months, thus lowering the additional month payment. The problem is that in years 2,3,4 and 5 the driver is now paying for insurance on there own and also still paying for the free year that is included in the car payment. Nationwide is NOT doing this gratis and they are being paid well by VW for this new fangled scheme. Nationwide would be fullish to price this model expecting to lose the first year and make up for it on renewals, they will never be able to capture enough business from young drivers to make it. I expect the average cost of a new VW just went up $2500. As a consumer I would not want to be insured by a company that makes that big of a gamble on young drivers, unless the cost is actually higher. How do we find out what Nationwide is actually charging VW for this freebie. Do I have options on coverage or do I just get the statutory minimums, what deductible are shoved at me? there is alot on questions that are not able to be answered yet.
Rather than having insurance be a sold through licensed professionals, it becomes a freebee used to sell other products.
I cannot comprehend how anyone could not see this as “Unfair trade practice.” Bottom line, if some guy goes to buy a V.W. Does another agent have any chance to write him? Clearly the department has given a dealership an unfair advantage.
The insurance company is selling V.W. insurance at a reduced rate in order to buy a volume of business and get a chance at the renewal.
As an owner of an insurance agency that sells auto insurance, I would be terrified save for the realization that this gimmick will fail.
RECENTLY MY CAR WAS HIT BY ONE OF THE PEOPLE YOU INSURE IN AUGUSTA GA. MY CAR HAS BEEN IN THE SHOP SINCE 4/01/2007 TODAY IS 4/19/2007 I HAVE BEEN IN A RENTAL CAR SINCE THIS ACCIDENT HAPPENED.ON 4/16/2006 ENTERPRISE RENTAL CAR ADVISED ME I WAS ONLY COVERED IN THE CAR UNTIL 4/19/2007 BECAUSE THE AJUSTER WOULD HAVE TO TELL THEM I NEED THE CAR LONGER BECAUSE MY CAR WOULD NOT BE READY UNTIL 4/28/07 WHEN I TRIED TO NOTIFY MR. WADE TAYLOR HE DID NOT CALL ME BACK I FINALLY GOT IN TOUCH WITH HIM ON 4/19/2007 I TOLD HIM WHAT AUGUSTA TAYLOR TOYOTA SAID ABOUT MY CAR I ALSO TOLD HIM WHAT ENTERPRISE SAID ABOUT HIM CONTACTING THEM . MR. TAYLOR WAS NOT CONCERNED ABOUT MY ISSUES AND HIS ATTITUDE WAS VERY NASTY FIRST HE ADRESSED ME AS Mrs. HOLLOWAY BUT AS HIS VOICE CHANGED HE SAID REMONA THERE IS NOTHING THAT I CAN DO RIGHT NOW UNTIL I TALK TO TOYOTA OF AUGUSTA!! IN A VERY NASTY TONE HE SAID HE FELT TOYOTA OF AUGUSTA HAD HAD THE CAR TO LONG AND SHOULD BE PAYING FOR SOME OF MY RENTAL. I HAVE HAD NO PROBLEMS UNTIL NOW. I DO NOT FEEL THAT MR, TAYLOR SHOULD HAVE TALKED TO ME THE WAY HE DID I ALSO FEEL WHAT EVER THE PROBLEM BETWWEN YOUR INSURANCE COMPANY AND AUGUSTA TOYOTA HAS I SHOULD NOT HAVE NOT BEEN ADDRESSED WITH IT! AND AFTER TALKING TO MR.WADE TAYLOR ABOUT THE RENTAL HE DID NOT EVEN CALL ME BACK TO LET ME KNOW IF I WAS TO KEEP THE RENTAL OR RETURN IT I ENDED UP HAVING TO GO TO ENERPRISE MYSELF. I HAVE BEEN VERY PATIENT WHILE MY CAR IS BEING FIXED BUT I ALSO FEEL I HAVE BEEN DISRESPECTED FOR NO REASON BECAUSE I HAVE NO CONTROL OVER HOW LONG IT TAKES SOMEONE TO FIX MY CAR. THANK YOU VERY MUCH FOR YOUR CONCERNS.
I just recieved an email notification that REMONA HOLLOWAY had commented on the difficult time she was having with the insurance company.I am sorry to hear that, and I hope she is able to get her car fixed quickly.
I cant help but notice that I have not heard of any other car companies joining V.W. in this folly, and I still say my original comment:
\”As an owner of an insurance agency that sells auto insurance, I would be terrified save for the realization that this gimmick will fail.\”
Seems to be holding true.
This was a bad idea on many different grounds, but the biggest problem was that it removed risk factor from the rating process. This concept gives the largest rebate to the youngest or highest risk drivers, therefore it will attract the worst risks driving up the cost of the car.
It also put young people into cars that they might not be able to afford when they had to pay for their own insurance.