Insurance

My insurance company charges me 5% more for monthly payment versus yearly payments.

This is the opposite to other service providers because the yearly payment is in advance not arrears.

This would imply that their cost of capital is between 3.5% – 4%.

That is, if they invest the proceeds of annual payments (from me) into their own business (in reality don’t have to borrow this amount) it’s worth the 5% discount.

The long term cost of capital of the global insurance industry is 5.5% which matches nicely but post-GFC it has gone up slightly to around 9% and probably dropping.

So why can my Australian insurance offer such a low premium for annual payments? Why is their cost of capital so cheap?

We must be a very stable environment where they can pass all costs onto their customers and their customers just suck it up.

Although they are in the business of managing our risks they aren’t taking very many risks themselves.

So why is there even competition among insurance companies? Why do they waste profits on marketing? Why is market share important?

You can imagine that there is a lot of competition for profitable business that is essentially risk free. For the money-hungry types it would be the equivalent of being kids in a chocolate factory.

But oh so boring…