When it comes to annual contract renewal time, short-term insurance policyholders will often receive a notification from their insurance company of a premium increase. Understanding the reasons why a premium increases can better equip a policyholder to negotiate a lower premium increase.
The short-term insurance market has become increasingly competitive over the past few years and consumers are now spoilt for choice when it comes to providers. As a result, renewal of a policy is a time when South Africans traditionally shop around, but it is important to understand the difference between inflationary increases on sums insured and actual premiums increases, in order to avoid inadequate cover from a cheaper provider.
Inflationary increases on sums insured, such as a home, its contents and all risks (the belongings the policyholder carries with them outside of the home e.g. a mobile phone or laptop) is not technically a premium increase. The cover for these belongings is heavily influenced by the Consumer Price Index (CPI) and the reason why insurers have to increase the sum insured (the value of the cover) is that these items will cost more to replace or repair a year later due to inflation.
Sum insured increases will typically give the policyholder more cover at the same rate. For example, the insurer will increase the policyholder’s building value by 6% and then the monthly premium for building will also go up by 6%. This is done to ensure the policyholder has adequate cover and that they will not be subjected to the average condition when submitting a claim.
The value of items such as jewellery are very important to adjust upwards as these belongings are greatly influenced by fluctuations in cost of precious metals and stones as well as the impact of Rand.
When it comes to premium increases at contract renewal time, insurance companies will review the frequency, severity and type of claims experienced by the insured during the past year and then the premium or insurance rate will be adjusted upwards according to this data. This can result in a higher premium being paid for the same amount of cover, especially if the insured has claimed quite often during the period.
It is a good idea for policyholders to ask how their premium will be affected at renewal before submitting smaller claims, as often it is not worth claiming when considering the annual increase in premium as a result. In addition, insurers will more often than not also impose an inflationary increase on the actual rate to ensure premiums remain adequate to cover projected claims.
Often an increase due to claims as well as an increase in property sum insured value can compound the effect of the increase. This is why it can seem as if the increase is above inflation but in real terms it is not the case.
When it comes to motor insurance, policyholders often find this aspect of insurance often most confusing, as the market value of cars typically reduce but premiums tend to increase at renewal, she says. Insurers do take the value of the vehicle into account when calculating a premium, but it is by no means the only factor which determines the premium. The majority of claims paid (as much as 80% of total claims paid) are for accidents and not write-offs or stolen vehicles. So one of the main factors in determining motor premiums is the actual cost of repairing the vehicle. The cost of parts and repair are heavily influenced by fluctuations in the Rand due to the fact that most motor parts are imported from foreign countries. The prices of the parts also constantly increase with inflation.
As a result, we have to increase our premiums every year, regardless of whether the insured claimed or not, to cater for the increase in the cost of repairing accident damage.
Most insurers will be prepared to renegotiate renewal increases if a good client is not happy with the increase proposed. If the policyholder looks after their insurance claims record, they will be in a position of power to successfully negotiate increases down, without having to change insurers. However, policyholders must make sure they are not confusing sum insured increases where they get more cover with actual rate increases.
Another word of caution, not all insurance policies are created equal. Typically by paying less, the policyholder will have less cover and it is therefore vital to do a proper comparison of cover. Check excesses, driver restrictions, policy cover and limits of extensions. When in doubt, it is always a good idea to ask your broker for help.
Below is a list of tips for consumers to evaluate whether they are paying an optimal insurance premium:
- Review your policy when it comes to renewal time;
- Be sure to compare apples with apples;
- Consider dealing with insurance providers who are prepared to guarantee your insurance premium for the annual term, regardless of claims filed;
- Consumers should not claim for every single little loss as most insurers also consider the frequency of claims that the client submit, even though it is for small amounts;
- Do revalue and adjust the value of jewellery in the insurance policy at times when the rand is under pressure. This will ensure that the increased replacement value is adequately catered for;
- Do not move insurance providers for a small saving in premium. Rather ask your current insurer to reconsider and adjust your premium if needs be. A long standing relationship with your insurance company can come in very handy when experiencing challenging times;
- It is always worthwhile to deal with a broker who could add weight to negotiating premiums.
Article credit: www.fanews.co.za