Save Money on Car Rentals: Excess Insurance
If you’ve rented a car from time to time, you’ll be familiar with a decision you have to take every time you pick the car up from the agency.
You get asked if you would like to “buy back the excess”, or “waive the excess for a fee”.
What this means is that you pay an extra amount per day, and they remove the excess on the car insurance. If you do not take this option and you have an accident, or a person steals or vandalises the car, you’ll have to pay the first £400 to £4000 of costs towards that damage before the car rental company’s insurance takes the rest. If you do take this option, that gets reduced to zero and you’re safe.
This option can cost anything between £5 to £45 per day, and if you think that’s a lot to pay to get rid of a risk, you’re right. You can get the same thing for much less money.
The Cost of Insurance
There’s a whole mathematical field that covers the calculated cost of insurance, called actuarial science. That’s the discipline that companies use to determine the cost of an insurance.
For an insurance company, they don’t really care what your specific risk of crashing a car, or having it stolen, is. They care about the population of cars as a whole, because they’re covering entire fleets of cars all the time.
They calculate the expected cost of all these accidents and incidents based on a number of variables: the time of year, the model of the car, the location of the rental, the accident rate for that lender, etc.
Once all this is calculated, they charge the renter a given amount to cover all their rentals for the year, for certain incidents.
The important thing to remember here is that the insurance company fully expects there will be accidents, and budgets a certain amount, based on its calculations, to cover those costs.
That is all they care about – covering those costs and making enough money on top to pay their operating costs with enough left over to satisfy their shareholders.
But what about the value to you?
When you buy insurance, you don’t think about whether you’re paying the expected probability-weighted cost of an incident. That’s not how normal people think about things – we aren’t all actuaries.
We think about the catastrophic loss of thousands of pounds because of some awful misfortune, or we think about the hundreds of pounds we’ll have to spend to fix a dent in the door because of a silly accident. All of a sudden, £15 per day doesn’t look that bad.
We drive our cars every day with hadly ever an accident, but the second it’s a rental, we start thinking about spending £15 per day extra as a reasonable insurance cost, to cover only the excess. It’s clearly not reasonable, but it’s hard to see that at the time.
We’re terrible at pricing risk. Our emotions get in the way. That’s why actuaries exist: to make better calculations.
The Right Price for your Rental Excess Insurance
Maybe You Already Bought It?
Car rental excess insurance is so cheap that some credit card companies offer it as a perk.
This isn’t always super-clear, and it’s worth being sure before you count on it, so call the companies you have credit or bank cards with and find out if their credit card includes this insurance as a service.
If it does, make sure you reserve and pay for any extras with that card. The insurance should automatically cover you for the excess of the car. As always with insurance products, ask for the contract and read the small print.
Buying it Separately
If you want to get rid of the risk of that rental excess, then you must never count on the rental company to sell you the additional cover. It’s basically free money for them, because you’re paying much too much for the policy.
You can save a ton of money by going to a company that specializes in covering this type of risk.
The car rental agency knows that they have a captive market, and that if you haven’t purchased your insurance before getting to the counter you only have two choices – buy theirs or drive away with the excess hanging over your head if you have an accident.
The real price for car excess insurance in a wesstern market (think Europe), is between £2 and £4 per day of rental. That’s much cheaper than anything the car rental companies are offering.
So do yourself a favor and buy car excess rental insurance before you leave on your holiday. You’ll protect the downside and you won’t get ripped off.
A Postscript on Insurance Companies
We love to hate insurance companies.
We feel that whenever anything goes wrong they always resist paying and make it complicated and difficult to get your claim paid.
The truth is that they provide a very valuable service.
If a single person has an accident, they suffer the cost of that accident entirely. All the financial consequences of that event falls upon their shoulders.
What insurances do is they combine risk across larger groups of people and then price it.
They take large populations of people and, for a given risk (such as damage to a car), they use statistics to measure how often that will actually happen over that population, and how much that will cost. Then they add a little on top because the number is uncertain and they need to cover risk, and a little more because they need to pay salaries, rent, running costs and shareholder returns.
Then they divide that total cost and charge each member of that population their share. This is a simplification, but it’s close enough.
Instead of running the risk of paying for your accident, you now have the certainty of paying your share of all the accidents across that population. The small risk of an expensive event has been transformed into a definite, but much less expensive payment.
Another way to look at it: You’ve paid someone to take a specific risk away.
They’re only able to do this because (1) they insure lots of people at the same time, for the same risk, (2) they control and limit which risks are covered, (3) they have the technical ability to p rice that risk, and (4) they’re sufficiently well-funded to pay out those people who have a legitimate claim.
If they cover more risks, everyone has to pay more to cover them. If they cover fewer people, the variability of their outcome increases and they need to increase their margins to cover the increased risk, and when people defraud them (such as by having deliberate accidents, or faking thefts), the cost of that is borne by everyone else who is part of that insurance.
A lot of insurance companies have the unfortunate habit of resisting claims if they think they can dissuade you, or delaying payment because they hope you’ll give up. Not all, though.
We love to hate insurance companies, but sometimes it’s worth cutting them some slack. One day you may be very happy you have insurance.