Question

Tyler just wrecked his new? Nissan, and the accident was his fault. The owner of the other vehicle got two estimates for the? repairs: one was for ?$615 and the other was for ?$667. Tyler is thinking of keeping the insurance companies out of the incident to keep his driving record? "clean." Tyler's deductible on his comprehensive coverage insurance is ?$500, and he does not want his premium to increase because of the accident. In this? regard, Tyler estimates that his? semi-annual premium will rise by $65 if he files a claim against his insurance company. In view of the above? information, Tyler's initial decision is to write a personal check for ?$615 payable to the owner of the other vehicle. Assume that Tyler keeps his Nissan for two more years and that his premiums do not change each subsequent year. What is the cost of claiming to the insurance? company? Did Tyler make the most economical decision? (as opposed to claiming to the insurance? company)? What other options should Tyler have explored depending on assumptions? made?

Answer 1

Cost of claiming to the insurance company = amount of deductible + rise in insurance premiums

Amount of deductible = $500

Rise in insurance premium for 2 years of $65 on a semi-annual basis = $65*2 years*2 (for semi-annual) = $260

Thus cost of claiming to the insurance company = 500+260 = $760

Thus cost of claiming to the insurance company>upfront payment of $615. So Tyler’s decision not to claim insurance is the most economical decision.

Tyler should have explored other options like opting for a loan to pay the costs. This will depend on assumptions like rate of interest and inflation rate.