MONEY COMMENT
Beware The Rule Of Three

By Cliff D'Arcy
May 19, 2003

Before joining the Fool earlier this year, I was given a life sentence with various banks and insurance companies, although I was released for good behaviour after serving just 15 years. From about 1992 onwards, I worked in marketing roles, during which time I came up with a theory that I now call the "Rule of Three".

I spent a lot of time engaged in market, competitor and product research and one interesting dynamic usually emerged. Whatever product I was studying, I almost always found two products that were broadly similar but differed in price by at least a factor of three. For example, the interest paid on a personal loan, the APRs (interest rates) of credit cards, premiums for motor, home and travel insurance and so on.

Often, the Rule of Three is a minimum guideline: for travel insurance, the most expensive policy can be almost ten times the price of the Best Buys. So, the Rule of Three is by no means exact, but at least it helps to define the spectrum of prices we may encounter.

Fast forward to this weekend, when I spent an hour online, shopping around for home insurance. The renewal notices for my buildings and contents insurance policies arrived a couple of weeks ago, which spurred me to look around to see if I could beat my current quotes.

Until this year, I always used Hill House Hammond (HHH), a leading insurance broker, to place my business. Whenever I benchmarked its quotes against other those from other brokers and insurers, HHH always came out ahead. That lasted until last year, when my buildings insurer pulled out of the market and HHH had to place my quote elsewhere. I was shocked to discover that my buildings premium was set to double to around £250!

By shopping around online last May, I found similar cover via broker The AA for under £110. This year, my buildings insurance premium has risen to almost £124 (£117 if I renewed online for a 5% discount). After shopping around, I renewed online with the AA, whose quote had gone up less than 7% over the course of a year.

As for contents insurance, again, HHH has been very hard to beat in the past. However, my annual premium has increased by a whopping 21.5%, to £147 from £121 (for £40,000 of cover, plus personal possessions and cycle cover, no accidental damage cover). This is a big hike, and one I'm not prepared to swallow. I checked out the Fool's Insurance Centre, which came up with a better quote (£140) and then visited insuresupermarket (ISM).

In just five minutes, ISM allows you to benchmark home insurance policies from over 60 different insurers to come up with a better deal. In my case, it couldn't beat the buildings insurance quote from The AA, but it did a "cracking" job with my contents insurance (boom, boom!). Online bank Egg (LSE: EGG) came out on top at just £129 for near-identical cover, including a 10% discount for Egg cardholders, which sealed the deal for me.

Amusingly, the most expensive quote for basic contents insurance of £40,000 (without the personal possessions or cycle cover) - £109 with Egg - was a staggering £325 with one insurer (which I won't name and shame). This is three times the Egg price, which validates my Rule of Three most elegantly!

For buildings insurance, the highest quote for my guesstimated rebuilding cost of £125,000 was over £300, again supporting my Rule of Three.

So, if you want to defeat the Rule of Three and get the best deals, use our Centres to shop around and save a packet: Mortgage | Credit Card | Personal Loan | Savings | Index Tracker | Insurance.