Is it time to renew your car insurance? Chances are you are covered by one of the big insurers – NRMA, RACV or AAMI. Have you checked on Budget Direct's premiums? What about Real Insurance or Youi?

The car insurance market is full of new names. In the past few months, Virgin Money and Australia Post have launched car insurance offerings.

Insurance Australia Group (owner of NRMA) launched an online business called The Buzz in May and there are rumours a large US insurer, Progressive, will enter the market in the new year.

With so many insurers offering cover for our beloved automobiles, consumers have the opportunity to shop around for a better annual premium. Data from Roy Morgan Research shows smaller insurers, such as Budget Direct, undercut their bigger rivals by 20 per cent or more.

Canstar Cannex has produced similar findings. In a car insurance ratings report published in November last year, it found Budget Direct, Real Insurance, Cashback and ibuyeco were the price leaders for most driver profiles. But it's another matter for young drivers.

“There is no question that these groups have brought price competition to the market. In some cases the price differences are very significant,” Canstar Cannex's head of research, Steve Mickenbecker, says.

But data on average annual premiums is only one part of the story.

Claims handling

Small insurers often keep their premiums low by targeting lower risks. Drivers over 30 with good driving histories and living in suburbs with low theft risk will be welcomed with open arms by every insurer. But the under 25s will find fewer options open to them.

The big question about small insurers is the quality of their claims management. Drivers can expect to be involved in an accident once every seven to 10 years and it is then that they find out how readily their insurer will agree to pay their claim, how quickly the claim will be processed and whether the work will be done to a high standard with quality parts.

It is hard for consumers to get an insight into the claims management experience of different insurers. There is no public data on claims and some of these insurers are so new to the market that reports on how they handle claims would be based on very small samples.

The head of KPMG's insurance practice, Brian Greig, says the big insurers have “huge claims infrastructure” and promote service as their main selling point. He says not much is known about how smaller insurers handle claims. Greig says one indicator is the level of complaints.

The Financial Ombudsman Service (FOS) reported in its annual review, published at the end of September, that general insurance disputes rose 34 per cent in 2008-09. The FOS says the high incidence of extreme weather events, including floods, storms and bushfires, accounted for much of the increase.

Of the total of 19,000 disputes handled by the FOS in 2008-09, 6400 were insurance disputes. Only credit issues accounted for more disputes. More than a third of the general insurance disputes (39 per cent) were related to motor vehicle insurance.

Disputes

The FOS says: “The most prevalent source of disputes concerned agreed understanding about the extent of the cover. The largest cause of disputes was generated by decisions made by service providers to decline a claim, cancel a policy and about the quantum of the claim.”

The problem with these figures is that they are not broken down by individual insurer, so they do not tell us whether disputes are more likely to arise when dealing with a smaller car insurer or new entrant. But what they do tell us is that car insurance is an area where there is a reasonable likelihood that a dispute will arise as a result of a decision made by an insurer.

The quality of the insurer's claims handling should be a consideration when choosing an insurer.

A principal of the actuarial consulting firm Finity, Colin Brigstock, says he has used Google to monitor the traffic going to the websites of the newer car insurers. He says the volumes are “noticeable”.

He says there is no reliable information about claims experience but insurers do conduct consumer research and produce what are called net promoter scores.

Consumers are asked to rate their experience of dealing with an insurer; those who give high scores are promoters and those who give low scores are demoters.

The difference between the two is the net promoter score.

“There have been some studies published from time to time," Brigstock says. "Like banks, insurers tend to get negative scores. But we don't have any evidence that small insurers or new entrants do worse than the big insurers.”

New players

The managing director of A & G Insurance Services Australia, Michael Weston, says his company's direct-to-market brand, Budget Direct, has a high net promoter score.

A & G is a multinational with operations in South Africa and Britain. It has been in the Australian market for 10 years and launched Budget Direct in 2000. More recently, A & G has been working through partnerships; it is the car insurance underwriter for GE Money, Virgin Money and Australia Post.

Weston says A & G uses the same IT system in Australia that is used in Britain to manage partnerships with British Post and retailer Marks and Spencer.

“It is designed so that everything from lead generation to claims is on the one online system. Every conversation is recorded," he says. "Having a system like that means there is less confusion about what has been agreed and fewer arguments when claims are made. We have high net promoter numbers, although we do not have the data to compare them with other insurers.”

Some of the newer insurers hope to attract business by offering greater flexibility in the underwriting.

Real Insurance offers an option called Pay As You Drive. Consumers pay a minimum premium for comprehensive cover and then buy kilometres. Any unused kilometres can be transferred to the following year. The lower the kilometres, the lower the cost.

It works on the idea that by driving less you reduce your risk of accident. It also tends to select lower risk consumers because older people drive less.

Finity's Brigstock says: “The evidence suggests anyone driving less than 10,000 kilometres a year will get an attractive rate on a pay-as-you-drive basis.”

Filters

The Buzz gives consumers a menu that allows them to add and subtract components from their cover and vary the cost accordingly. They may, for example, want to leave storm and hail damage out of the terms of a comprehensive policy.

The chief executive of The Buzz, Jacki Johnson, says IAG established the brand for consumers who like to transact online. “This is a savvy group,” she says.

“They want to be able to make choices and have the pricing consequences of those choices be very transparent. They may not want storm or collision as part of the package. They take the bits out or change the excess and we tell them what it is worth.”

IAG is underwriting policies written by The Buzz but the new business has its own claims team. Since its May launch the group has had only a small number of claims but Johnson says responses have been good. “We have received no negative claims feedback,” she says.

Brigstock says most of the new players are looking for niches.

“In different ways they are putting filters in place to come up with better quality risks," he says.

"An online-only business like The Buzz will have a skew to an internet-savvy higher socio-economic group.

"Pay as you drive is about attracting people with low mileage. Some groups do it by declining cover to high risks, such as young people, or by making the price prohibitive. The cost structures for insurers do not vary all that much over time. What allows an insurer to offer a better rate is that they are selling to a better risk group.”

A & G's Weston says Budget Direct “will give a good price to 95 per cent of people”.

It will not cover cars worth more than $175,000, heavily modified cars or drivers with a drink-drive history.

Competitors say Budget Direct premiums for drivers under 25 are high and effectively exclude that group.

Golden hand-cuffs

Johnson says The Buzz has chosen to be competitive across a wide range of ages. “The problem with making it difficult for 19-year-olds to get cover is that they live in households with the 50-year-olds you want to do business with.”

One area where the new players cannot compete is in offering multi-policy and loyalty discounts. When the discounts offered by AAMI and NRMA are taken into account, the actual cost of the cover may not be so different from what is being offered by Budget Direct and the others.

The chief executive of Virgin Money, Matt Baxby, says the group is looking at a broad range of products to accompany the car insurance offer it launched in August.

Virgin's pitch to motorists is an offer to cap premiums for the first two years. It is working on the premise that consumers are sensitive to the current cycle of rising rates. Virgin is also offering 13 months of coverage for the price of 12 months when customers sign up online.

But Baxby says the group's research indicates that consumers would be prepared to give a lot of business to Virgin and by growing the product set it can start to offer the sort of multi-policy discounts that lock consumers into relationships with big insurers.

Need to know

Market or agreed value? When a car is stolen and not recovered, or is written off, the claim is settled on the basis of market or agreed value. Market value means the payout represents the cost of purchasing a vehicle of similar make, model, age and condition.

Agreed-value cover means the insurer will pay an agreed amount in the event of total loss. In some cases the consumer will need a valuation before the insurer will offer agreed-value cover.

People who have new or late-model used cars may prefer agreed value to protect them from the impact of depreciation. Owners of vintage cars usually opt for agreed value because the rarity of the car can make it hard to replace. Drivers of old cars usually save on the premium and take market value.

Modifications Some insurers will decline to offer cover for cars that have been heavily modified. One reason is that repairing modified cars and replacing non-standard parts is expensive. The other reason is that buyers of modified cars tend to be young men who are high risks.

Theft prevention A car is stolen every eight minutes in Australia, adding up to 700,000 a year. Insurers give a better risk rating to cars with alarms and immobilisers and to owners who are able to garage their cars at night.

Comparison sites Websites such as iSelect and Rate City provide a service that allows consumers to do some comparison shopping on car insurance premium rates. However, consumers need to be aware that not all insurers provide their data to these sites; you get the best rate from what is available, not the whole market.