Audicare - the defection from single price insurance models

Models of adverse selection in insurance suggest that you have to charge people according to their expected cost, and that fixed price insurance is never going to work. If you charge both the sick and the healthy the same for health insurance, the healthy will drop out of the market. This will leave only the sick, whose rates will get even higher, driving out even more healthy people. 

One insurance where this DOESN'T happen is for emergency car repairs.The standard model for insurance for towing expenses is that of the AAA (or in Australia, the RAC or equivalents) - everyone pays a fixed amount for the right to get towing services if your car breaks down, battery service etc. Once I made the mistake of buying a 13 year old Honda Civic from a Pakistani used car salesman. Free tip for life kids - don't do that. The car had a funny wobble when you got to about 55 miles per hour. I took it into the shop and it turned out that the tyres weren't all the same size. Not only were they different sizes at the front and back (!), but they were also different sizes on the left and right (!!!!). Long story short, I had no end of problems with the car - radiator blew, axle broke etc. So you can imagine that I got some superb value out of my AAA membership for those two years. Then I got a job, and bought an Audi. 

My guess is that most people are largely paying for the peace of mind of having a number that you can call when things go sour with your car, so that you don't need to stress about what you're meant to be doing. The cost isn't that high, so they don't think about it much. But one way or another, the people with good cars are getting a poor deal from this, and freeloaders like I was get great deals. This creates incentives for people to select out those with good cars.

Enter Audicare. Audi, like many luxury car companies, provides complimentary emergency repair service on their cars. This isn't free of course, you just pay for it with the cost of your car. But it's something that's good for them to do, because they can provide it much more cheaply than AAA. They can do this, because they're pricing the expected cost of emergency towing to a fleet of new Audis (~= not very much) rather than a fleet of half new Audis and half 13 year old Honda Civics bought from Pakistani used car salesman (~= significantly more). Bottom line, I haven't bothered renewing my AAA. 

The real surprise is that fixed cost insurance manages to persist in the face of competition selecting only the high quality cars. My guess is that if it cost a couple of grand a year, rather than fifty bucks, the scheme would collapse. Still, I'm glad it hasn't - I would have been in the poo without it, and I'm sure lots of other people with crummy cars are very grateful for the wealth transfer that arrives exactly when you've got that sinking feeling watching smoke rise out of your bonnet.