Should you ever buy rental car insurance?

By Paul

Tim Harford asks that question in his recent column at Slate discussing the prevalence of overpriced insurance;

“Matthew Rabin and Richard Thaler pointed out in 2001, in a paper that surprised even their fellow economists, that anyone who pays even slightly more than the fair premium to escape from a risk on a $90 phone or a $900 insurance deductible must be making a mistake. The stakes are too tiny: In the context of a $1 million lifetime income, even $900 is a small enough risk to swallow. We should turn down these offers of insurance and save the money in a contingency fund to pay for the occasional loss. The odds would be well in our favor and the petty uncertainty shouldn't cause us a single sleepless night.”

Related Blog; Decision Science News

-- May 15, 2006 12:09 AM |

Comments

Ryan Cousineau wrote:

I think the simplest way of describing this principle is that you should only insure against losses you can't afford to experience. I suspect for most people, in the realm of brutal honesty, that's their house, maybe total loss of all interior contents, and that's it.

Any really expensive car can be functionally replaced by something costing a fraction of the price, except where the status value is high (a real -dollar issue for sales and marketing types, perhaps, but merely a matter of taste for the rest of the world).

The problem is that, as you say, we overvalue stability. Insurance buyers use it as a way of hedging risks, but at a considerable price, and in circumstances where the liability exposure is affordable.

On the other hand, the real problem is that you might have a million dollars over your life, but you don't have $900 right now.

I also suspect some of the overpricing is down to moral hazard: the self-selecting group of insurance buyers is either innumerate or genuinely more likely than average to use the insurance coverage. If my plans for that rental car include some ad hoc dragstrip runs, well then I am a lot more eager to put that deductible risk on the rental agency for a mere $10.

Didn't get an extended warranty on my Playstation 2, paid about 2/5 original purchase price in repairs, still don't buy extended warranties,

-- May 15, 2006 3:21 AM ∞

Kevin Brancato wrote:

If my plans for that rental car include some ad hoc dragstrip runs, well then I am a lot more eager to put that deductible risk on the rental agency for a mere $10.

Yes! Don't insure just the big risks, but also those risks that are greater for you than the insurance salesman believes, even if you can readily afford the loss without insurance. I mean, people who are informed about the size of their own risks should be trying to profit from Adverse Selection, just like the salesmen are trying to profit from those who don't know the size of their own risks.

For example, I bought new notebook computers a few years ago -- insuring the one for myself, but declining the extra insurance for my wife. Why? Differences in usage. I'm somewhat clumsy, my laptop is wide, light, and in a strangely flexible casing, I use it a LOT, travel with it, and tinker with software and hardware upgrades... sure enough, I've had screen hinges crack and the screen warp, both requiring replacement, And I've had the ethernet port come loose, and I've had a touchpad sink into the case.

My wife's small notebook is still in perfect shape....

-- May 15, 2006 2:07 PM ∞

Sukamto Ngadimin wrote:

yes we should :)

anything happen, it is always insured

-- September 8, 2007 6:07 AM ∞

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