By Larry Haverkamp

IF you drive a car, you need car insurance. It's the law.

The problem is, it's hard to know which insurer offers the best deal.

There is more to it than just comparing the first-year premiums.

To find out, an important statistic is "claims to premiums".

That's "claims an insurance company pays for accidents" divided by the "premiums it charges". I have just completed a study which calculates this important ratio.

Policyholders benefit from a high ratio. But insurance companies need to keep it low to boost their profits. They call it an "incurred loss ratio".

The ratio is highest for insurers that are generous in paying claims and charge low premiums.

By this criterion, Mitsui came in first among the 12 largest auto insurers. Next came China Insurance then Tokio Marine. These firms paid out $96, $90 and $83 in claims for every $100 they collected in premiums.

The auto insurance market is concentrated. The 12 largest insurers have more than 85 per cent of the market and the three largest have 70per cent.

They are NTUC Income, AIG and AXA which, surprisingly, placed rather low in our ratio - in 6th, 10th and 12th places.

Why didn't the big boys do better?

Possible reasons:

(i) Large insurers may be able to get customers on the basis of their name. They don't have to cut premiums as much to get new business.

(ii) They are able to capture business by offering generous commissions to car dealers who tie that firm's auto insurance to the car sale.

(iii) Some, like NTUC Income, have reduced claims payments by requiring workshops to use second-hand, reconditioned parts when repairing cars more than 3years old. The cheaper parts reduce the claims to premiums ratio.

Small car insurers typically lack the muscle to do this. They must fight for new business by offering lower premiums, which raises their ratio of "claims to premiums".

There are drawbacks to the ratio, such as a one-time surge in accidents or a fraudulent claim. These can usually be remedied by averaging the data over a few years. My study looked at the period 2005 to 2007.

Despite the flaws, "claims to premiums" is the best we've got. No other number gives as comprehensive a picture of "value for money" in car insurance.

This article was first published in The New Paper on July 07, 2008.