Sports Cars' Drivers in the UAE Could Be At Risk of Under-Insurance

According to the comparison motor insurance Dubai portals, an analysis was done for the average insured value cars of the year 2014 against the average costs of the same models at dealerships. This comparison stated that many of the second-hand sports cars are being sold for a value that is above the average insured value of the cars.

With some of the models, the difference in the costs is severe. For instance, the average insured value for a Porsche 911 Carrera 4 of 2014 is around AED 215,000. However, roughly the average cost for this car’s second-hand model is AED 346,000 in UAE. Similarly, the average dealership cost of a BMW Z4 sDrive 28i 2014 model is AED 130,000 and the insured value of the same car model is AED 108,300 in UAE.

There are other models in the market that face a slightly lesser discrepancy between the average insured value and the average selling price. One such model is the Dodge Challenger R/T of 2014 wherein the car’s average insured value lies at AED 70,100 and the average selling price at a second-hand dealership in UAE falls at AED 82,300.

The experts at the comparison sites have ruled out two scenarios that are possible for the above-mentioned instances. The first reason could be that the dealers of second-hand cars could be over-charging when it comes to certain models. Or on the other hand, the customers in the market could be under-insuring their motor vehicles.

The first reason can be largely overlooked but not entirely rejected. It is definitely the case wherein there is an assumption of asymmetrical information between the seller and the buyer that leads to a reduction in the car’s market value at the purchase point. To put this concept in simpler words, if Person X buys a car for AED 200,000 on Monday and tries to sell the same car to Person Y on Tuesday, Person Y will obviously question the sale initiated by Person X assuming that the individual has found something that is not right with the motor vehicle or needs to quickly get rid of it.

This assumption of the asymmetrical information involved could explain the insured value being lower of some of the sports cars in the market. However, if we consider the fact that many other cards, even the SUVs in the market do not face the same discrepancy between the selling price and the insured price, it is enough evidence to suggest that the issue could actually be the second reason i.e., the fact that the drivers of sports cars in UAE are under the threat of being under-insured.

The experts have claimed that either the drivers of the cars are willingly under-insuring them, or their insurers are reluctant to agree to the cars’ valuations. The insurance providers generally agree to a range of vehicle valuations, which thereby has an impact on the payable premium amount. Hence, it is possible that some of the sports car drivers go on the thinner edge of this wedge to save some amount on their insurance policy’s premium. However, while the providers are happy to give out policies that have a higher premium, they are even happier to insure vehicles with lower values to avoid any moral hazard.

Moral hazard is an occurrence when someone tends to increase their risk exposure when they are covered via a motor insurance Dubai. In other terms, if a sports car driver is aware that he is ought to get a fixed amount of money back when writing off the vehicle, he might become more laid back about the risk of a collision, or even might consider damaging the vehicle deliberately beyond repair.

As per the professionals of the comparison site in the situation of sports cars, that are high-risk vehicles, it is possible that the insurers may place downwards pressure on the car’s valuation in order to mitigate the moral hazard risk. No insurance provider would like to be in a situation wherein a vehicle is insured for a value that is more than what it is worth. This immediately aggravates the risk of moral hazard.

Undeniably, this discrepancy between the average cost at a dealership in UAE and averaged insured value is nowhere near as bleak in the case of saloons and SUVs that are generally considered as vehicles with a lower-risk. For example, a 2014 model of Mitsubishi called Pajero GLS has an average insured value that lies at AED 60,340 and this same model can be found at a dealership in UAE for the cost of AED 59,000. There is a similar scenario in the case of a Chevrolet 2014 Malibu LTZ, which has an average cost at UAE Dealerships of AED 50,000 and has almost the same insured value. Even the Jaguar 2014 XF 2.0 liter has an average insured value falling at AED 99,700 and the selling price falling at AED 100,000.