Ask HN: What are the problems that would prevent this business from working?

[mfieldhouse]

Here's a thought experiment for a hypothetical business which would be based in the UK and sell to customers in the UK only. What are the problems that would prevent it from working or being simple.

According to the AA, the average car insurance for 17-22 year olds on Oct 2011 was £2342.

The idea is to create a car insurance business which has a flat rate yearly insurance fee of only £600 for under 23 year olds with 1.4 liter engine car and under.

First year get 500,000 customers at £600 each. That's 300 million. 5% of them make a claim with average cost £5000, that's 25,000 times 5000 which is 125 million. Plus another 10 million for that year for misc fees and total costs are 130 million. You've made 170 million. Close the business down after the first year and go buy your own island somewhere?

If someone could give a US perspective on it, that would be good too.

[lmm]

As a sibling post said, where are you getting your figures from? If they're correct, I'm tempted to apply the economists' argument: why aren't insurance companies doing this already? We see specialized companies (mostly just "imprints" of existing ones) for old people, women, track day enthusiasts etc. I could believe a plan to make say 10% ROI, but if this venture was as crazy profitable as you're suggesting I'd expect a "traditional" insurer to have done it already.

Bear in mind that your customers will choose the cheapest insurance: only those who are being charged more than #600 will apply. If that average of #2342 was actually 95% of them getting insurance for #300 and then 5% super-dangerous teens who're charged #40000 each, only the latter will take you up, and you'll pay out a lot on their claims.

All that said, I do hope you find a way to make it work. Insurance for under-25s is crazy expensive.

[mooism2]

Where have you got your "5% of them make a claim with average cost £5000" figures from?

Are employee costs included in the £10 million for misc fees?

I would think you'd also have to make an allowance for fraud (both in terms of write-offs and fighting it).

The biggie: How many drivers aged 17-22 are there in the UK, and how much will you have to spend on advertising to get 500,000 of them to sign up?

£125 million + £10 million is not £130 million.