Wednesday, January 20, 2010

You Can Save Money On Your Car Insurance!

There are a lot of commercials for car insurance on television. Many of them claim that people who switch to their insurance company save a certain percent, or a certain amount of dollars, compared to their old car insurance. Yet it can't be possible that every car insurance company has cheaper rates. Can the average person who switches saves 15% or more, or $150, or whatever?

Yes. The reason that it's possible is that the people who wouldn't save money by switching don't switch. As a result, the average person who switches saves money. This is similar to a point Steven Landsburg makes in The Armchair Economist. He argues that grocery stores can truthfully claim that shoppers buying there can save money, because they are each touting the sale prices of their cheapest goods--and these goods are different from store to store.

A remaining question is why there might be enough price dispersion to allow such different policy prices for different consumers; I don't know the answer to that. Perhaps different sellers specialize in different kinds of customers, resulting in specific knowledge and human capital that allows them to charge lower prices to those customers. That is, Safe Auto and GEICO probably attract different customers.

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