Because of that, I've never gone to pick up a car from, say, a brake job and been presented with a 4-5 digit unexpected bill because "Our shop assistant wasn't available so we had to pull in the Bugatti specialist next door to help bleed the brakes".
Unfortunately, he missed several significant signs of expensive damage. The engine had to be replaced, the frame required more work, etc. etc. At the end of the process, GEICO bought us a very expensive new old truck.
It might be hard to believe, but that's largely how healthcare pricing works in Singapore. Especially for routine treatments and surgeries.
Healthcare is different as it is a series of cartels on multiple layers, and the risk-based aspect of insurance is blunted by the amount of chronic stuff covered. Your auto insurer doesn't cover broken brakes, but your health insurance covers blood pressure pills.
A 15 minute consult with a GP is paid differently depending on whether the outcome of that consult is that you're diagnosed with e.g., strep throat vs. cancer.
Prices for common procedures are publicly posted at your doctor's practice.
There are like 10 layers of mayhem and negotiation and esoteric rules.
IMO having some sort of universal care paired with optional enhanced private coverage for acute issues or other things would make sense.
You don't need insurance for small things you can pay out of pocket. (Or entirely predictable costs like a pregnancy without complications or getting glasses every year.)
You need insurance for catastrophic events that would wreck your finances.
Yes, this is the problem with cost-plus pricing in every context.
Auto repair costs are capped at the value of the vehicle. There isn't a stream of indigent customers coming in for emergency repair that have to be subsidized by everyone else. There's far more visibility into risks - insurers have access to your driving history and can refuse to offer coverage based on it. You can volunteer even more information to lower your rates - from credit history, marital status, educational level, all the way up to installing a device on your car's OBD port to monitor your driving habits.
In short, auto insurance and repair really isn't anything like healthcare.
"My insurance told me to go to X shop, which was 3x as expensive as this other shop and was going to take two weeks to repair my window." -my roommate
> I'd like a 1995 Civic bumper, dark blue, with UV Fading to match 10 in-garage years and 10 out, but indirect sunlight. Please.
Also, mechanics in the US usually charge book time instead of actual work time to customers: you pay for the hours that the manual says the job should take regardless of how fast or slow the mechanic actually is. So, more efficient mechanics prefer labor-heavy jobs because working faster than average effectively brings in a bonus.
Usually this is not the case. Google "flat rate pay", it is the norm for automotive shops. As you get into more specialty stuff (commercial truck and heavy equipment repair, pure body and paint work) hourly pay is more common but still not the norm.
>Also, mechanics in the US usually charge book time instead of actual work time to customers: you pay for the hours that the manual says the job should take regardless of how fast or slow the mechanic actually is. So, more efficient mechanics prefer labor-heavy jobs because working faster than average effectively brings in a bonus.
This is correct but what you're missing is that because of how flat rate pay works the shop rate is XX and the tech gets YY of that so the incentive for both the shop and the tech is to work as fast as possible without doing so bad a job that the customer comes back telling you to fix it.
It's also worth pointing out that labor and parts pricing schemes is one of the back end things shops tweak in order to differentiate themselves and/or obtain competitive advantage so that adds a whole 'nother layer of incentives on top of the incentives provided by flat rate pay.
Parts markups schemes (if any) vary wildly from shop to shop. Some shops have a couple suppliers and order everything for them. Some shops stack up two weeks of work and have the service writer spend their afternoon ordering stuff through the same eCommerce channels consumers use. Some shops try not to stack up future work, have accounts with all the local parts stores and get stuff delivered same day. Some shops vary the parts markup by part class (e.g. one markup for body parts and a different markup for brake parts). Some shops charge the customer cost and make their money on labor to incentivize customers to splurge for "while you're in there" type repairs (e.g. rotors to go with pads).
Some shops proudly discount the labor (lower shop rate) and try to make it up on parts.
Labor cost to the shop also varies by tech. The guy who can re spray a bumper is gonna make a higher fraction of the shop labor rate than the guy who can only install a bumper cover.
The service writer can also have their pay tied to incentives to sell parts, or maybe a class of parts, or maybe labor, etc. etc.
Depending on the specifics of the particular shop slapping on pre-painted bumper covers may very well make the same amount of money as a proper re-spray. There's so much variation it's hard to generalize.
> For the shop, the labor cost is already sunk.
For me this means - "labor hours are constrained, so I should spend them wisely". If I wanted to buy more labor hours, I have to hire a new person and pay more money. That means preferring jobs where the markup is on non-labor things i.e. new parts. As long as my job pipeline is full and my employees are at 100% utilization, preferring less labor-intensive jobs will drive greater profits. Because I can complete more jobs overall, leading to more revenue.
Don't get me wrong, I understand that the markup on labor is higher than the markup on parts. But if you're betting on higher profits by selling more labor hours, then you're also constrained by physical space, your ability to hire labor and pay a competitive wage, the risk of a downturn etc. It's almost like software consulting vs software products. Selling products is always going to be more scalable and profitable.
Is my logic wrong somewhere?
For most brick-and-mortar shops, it sustainability, not scalability, that dominates. If you’re tooled up assuming the market will stay hot, you’ll struggle when the inevitable downturn comes. On the other hand, if you can stay break even at 50% of normal volume, you’ve got a chance to ride through a recession with your business intact.
The comparison to software breaks down when you’re talking about products, because the shop is a reseller; there’s a pretty hard limit to the amount of retail markup the market will bear before competitors crop up.
(1) As it turns out, this isn’t completely true; see the other reply.
Or you can buy a new bumper for 600 eur, charge a thin margin on it, and then add maybe one hour of labor. Most of what you charge goes to Honda, you make maybe 150 eur, and then hope the next job comes soon so that your tools and people don't sit idle for too long.
Especially since auto insurance is something you can get online (or via the phone, if you are old fashioned) anywhere in the country from anyone else in the country.
Alas lots of regulations that are supposedly in favour of the customer don't really do very much despite good intentions, when there's a lack of competition.
For example, British grocery shopping was priding itself on being very competitive (it wasn't), got constantly dinged by their regulator for stupid stuff; but only really woke up once Aldi and Lidl showed up on the scene and gave them a run for their money.
Similar with British retail banking. It used to be really awful. For example, they charged you extra fees if you were poor enough that occasionally you didn't have enough money for your standing orders to succeed. (Instead of just failing the standing order, they failed them and charged you.)
Their regulator told them off and fined them repeatedly. But without changing anything much.
The recent arrival of new challenger banks like Monzo seems to be making a difference, though.
Otherwise doesn't a refund go against the whole idea of insurance? The idea is you pay a premium not knowing if you'll need it or not, and they take on all the risk if you do need it.
If you ask for your premium back because you didn't need it you're missing the point of insurance.
It's not getting your premium back because you didn't need it. You'd still get back this portion of the premium even if you get into a car accident on your way to the grocery store, because it's not about you, it's about everybody else. The average risk went down, so the average premium went down.
This certainly happens in the other direction too, they'll raise your premium for the next period if the average risk goes up. But their marketing departments aren't stupid. Sending everybody a check right now makes their "largess" more conspicuous to customers than sending everybody a smaller bill next quarter. It also keeps you from canceling your policy with them and switching to someone else currently offering a lower rate because of the currently lower risk.
"Allstate did me a solid when they didn't have to" is a pretty good PR move, especially if they're suddenly awash in cash due to reduced claims.
Even for a for-profit insurer, insurance is a fairly competitive market. They might have to give the customers the money anyway to keep them from defecting to the mutual insurance companies. Even if they didn't, that would make being in the insurance market more profitable, which would attract new competitors, which would drive down premiums/margins until the risk-adjusted return of becoming an insurance carrier was back where it was. In other words, in a competitive market the customer gets the money one way or another.
This is a common occurrence with regulation. The regulation requires some good thing that would have happened regardless, the good thing happens and the proponents credit the regulation even though it was inevitable. Meanwhile you have a compliance cost, because it takes resources to keep track of the regulation and make sure you're complying with it even if it was the exact thing you were going to do anyway. That makes everyone poorer -- the compliance cost is the opposite of the windfall, so it makes it less attractive to compete in the insurance market and allows companies to pass on the compliance costs as higher premiums.
1. If there is extra profit one year, these companies will willingly reduce premiums instead of giving bonuses, stock buy backs, or dividends to investors. I don’t know if you have observed the stock market recently
2. “Compliance cost” - these things are not done via paper and fax machines. Regulation simply asks one to keep track of, say in the case of medical companies, administration cost vs servicing cost etc - things you would have had to do anyways in your public-good-seeking scenario above
It's the thing competitive markets require of them. If costs go down, one company is going to notice how much more profit they can make by lowering prices and using the lower prices to triple their market share. The others then have to do the same thing or they continue to lose market share.
The buybacks are something else entirely -- they're a result of low long-term interest rates. Companies have at least two ways of raising capital. They can sell stock and they can borrow money. When interest rates are low it makes more sense to raise money through borrowing than selling shares. Buybacks are the reverse of selling shares, so when interest rates are reduced there is a rebalancing which involves companies borrowing more money and buying back shares because it's cheaper to use borrowed capital than invested capital when interest rates are low.
> 2. “Compliance cost” - these things are not done via paper and fax machines. Regulation simply asks one to keep track of, say in the case of medical companies, administration cost vs servicing cost etc - things you would have had to do anyways in your public-good-seeking scenario above
Have you seen the regulations in some of these industries? There is nothing simple about it. It requires you to have lawyers in addition to accountants. And the lawyers are pathologically risk-averse but have plenary control over compliance policy because no one wants to end up in court, so the rules in practice are characteristically much more rigid than what the legislature intended.
Many of the costs are also fixed rather than proportional to customer volume, which disproportionately impacts smaller companies and results in a disproportionately large negative impact on competition.
I mean, something that comes to mind in terms of current events, people selling puts (stock options) just before the stuff hit the fan with COVID-19, were selling insurance. It seems really difficult in my mind to argue that that insurance was priced correctly just before the panic started.
The question doesn't make sense. The price is neither correct nor incorrect, it is just the price. It may or may not lead to financial success based on a whole host of factors but that isn't the same thing as "correct" or "incorrect".
If claim volume drops, they means they don’t get to necessarily keep the extra “profit.” I am not familiar with the rules around auto (I used to be a disaster home/property claims adjuster,) but I suspect auto rules are similar. It isn’t about risk being reduced, but more about claims payouts being projected less than the premium rates have accounted for. Insurance companies actually want lower rates — it means they sell more insurance which further deepens the risk pool.
The idea that you can keep things in place to save money, or in this case an extended-run plan as well, is a lie. It's not.
I would say that what we would do would fall on the taxpayers side by the way — not even if they had the flexibility to keep things in place but to continue servicing the insurance, keeping insurance in place until the company would be bankrupt in the event of a collapse.