Drivers of sports cars in the UAE may be under-insured – in some cases drastically, according to an analysis from yallacompare, a Middle East comparison site.
Using data from policies sold through its car insurance comparison portal, yallacompare analysed the average insured value of 2014 model year cars against the average cost of the same cars at UAE dealerships. This comparison found that many second-hand sports cars are being sold for more than the average insured value of these cars.
With some models, the differences are stark. For example, a 2014 Porsche 911 Carrera 4’s average insured value sits at AED215,000 (US$58,534). However, the average cost of this car at second-hand dealerships in the UAE is AED346,000. A similar story can be found with the 2014 BMW Z4 sDrive 28i, which has an average dealership price of AED130,000 – well above the car’s average insured value of AED108,300.
Other models, such as the 2014 Dodge Challenger R/T, see a less extreme discrepancy between average selling price and average insured value, but a difference still exists. That car has an average insured value of AED70,100 and an average cost of AED82,300 at second-hand dealerships.
“There are two possible explanations for this. The first could be that car dealers are over-charging for certain models – specifically sports cars. Alternatively, customers could be under-insuring their cars,” said Mr Jonathan Rawling, CFO of yallacompare.
“The first explanation can be largely, but not wholly rejected. It is certainly the case that assumed asymmetrical information between the buyer and seller will reduce the market value of a car at the point of purchase. In other words, if Person A purchases a car for AED200,000 on a Tuesday and tries to sell it to Person B on a Wednesday, Person B will question the sale, and assume that Person A has found something adverse about the car, or needs to get rid of it quickly.”
This assumed asymmetrical information could explain the lower insured value of some sports cars. However, given the fact that many cars, including common SUVs, do not see the same discrepancy between insured value and selling price, there is evidence to suggest that the problem could actually boil down to the fact that sports car drivers in the UAE are under-insured.
“Either individuals are willingly under-insuring their cars, or insurers are unwilling to agree to the valuations of these cars,” Mr Rawling said.
“Insurers generally accept a range of vehicle valuations. And the valuation impacts the premium payable. Therefore it is conceivable that some drivers go to the thin end of the wedge to save a little bit on their insurance policy. However, while insurers are happy to sell policies of a higher premium, they are even more inclined to insure cars with lower values in order to avoid moral hazard.”
Moral hazard is something that occurs when someone increases their exposure to risk when insured. In other words, if a driver knows that he will get a certain amount of money back when writing off his car, he may become more blasé about the risk of an accident, or may even consider deliberately damaging the car beyond repair.
“In the case of sports cars, which are already high-risk vehicles, it may be that insurers place downwards pressure on the valuation to mitigate the risk of moral hazard. An insurer obviously does not want to be in the position where a car is insured for more than it is actually worth. That immediately exacerbates the moral hazard risk,” said Mr Rawling.
Indeed, the discrepancy between average insured value and average cost at UAE dealerships is nowhere near as stark when it comes to common SUVs and saloons – generally considered to be lower-risk vehicles. M
AED1 = US$0.27