First time insurance buyers sometimes only realize that they have to pay an excess when they claim.
As such, it is important for consumers to understand the small print when signing insurance contracts.
Most consumers will have excesses on their policies, yet few understand how excess works.
From an insurers perspective, excess is applied to reduce the number of small claims and remove the costs of administering these claims. When insurers are able to recognise a pattern in a clients’ claims, additional excesses are often applied to discourage the pattern.
For example if items are being lost too frequently, an excess loading may be applied specifically for those types of loss.
“This process makes people aware of their claim patterns, forcing them to take corrective action in those areas of most frequent, and now more costly, loss” says Gari Dombo, Managing Director, Alexander Forbes Insurance.
From a consumers’ perspective, an excess is the first amount payable by the insured when they make a claim. The excess will be stated in the policy schedule if it applies. It is sometimes referred to as a deductable.
“The excess payable under a policy is expressed in your schedule either as a percentage of the claim, a percentage of the sum insured, or a flat figure” says Dombo. You should read the excesses carefully to understand what it will cost you when you claim.
For example, most insurers require an excess to be paid when a vehicle has been involved in an accident.
If the excess is R 3000 and the insured vehicle sustains damage to the value of R15 000, the insurer would only pay R12 000 towards the damages. The R3000 balance would be for the account of the policy holder in accordance with the excess agreement.
Should a consumer feel an excess is uncomfortably high, insurers will sometimes agree to reduce, or remove the excess entirely, for an additional premium. This is often the case with motor insurance.
Conversely, consumers can reduce their premium if they agree to take on a higher excess.
Dombo advises consumers to “find out what excess you are carrying and then to decide if it is enough, too much or if you can afford to carry more – and then negotiate the premium-excess balance that suits you.”
Certainly, reduced monthly premiums over the long term could well off-set a slightly higher excess when and if a loss occurs. That said, if consumers choose to carry more excess they should make sure that they are able to finance the excess should a loss occur.
For example, if you have insured a 1985 Porsche that you drive twice a year, it makes sense to pay a lower premium and take on a higher excess.
You can afford to take on a higher risk because the chances of your vehicle being involved in an accident are much lower.
That said, in the event of an accident you need to be confident that you can cover the higher excess.
In short, it’s all about balancing what you pay each month, which adds up over time, with what you could afford to pay, as a once off, in the event of an accident.
Since, however, a higher premium over time can add up, as a rule, “it makes sense to pay as low a premium as possible by making sure that at all times you have sufficient funds to pay a higher excess” concludes Dombo.
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