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Tuesday 18 June 2019

An Insider's Insights Into Car Insurance


Even more stealthy than me? 
I recently came across someone pondering whether it was fair for an insurer to increase someone’s premium after they had claimed for an accident.

 Seeing it was only an accident, surely they shouldn’t be punished?

It’s an interesting question, and while it might be easy for everyone to jump on board and begin sticking it to the industry, I immediately started playing devils advocate - there is almost certainly some significant statistical evidence which will show the insurers have very good reason for doing this?

If only there was someone who I could ask to confirm…

Well, lucky me!

I just so happen to be fairly well acquainted with someone who works at one of the large car insurance companies (if I had MiWay, I would disclose which company it is, but I am not at Liberty to do that, so if you want to find OUT who it is, you will need to make your own Discovery). And so I got in touch and asked them to share what they knew about claims resulting in higher premiums.

What followed was a really interesting discussion which soon branched off into some other areas of car insurance. I immediately realised that some of this information from inside of the car insurance beast may turn out to be really helpful to readers of the blog, and so I asked his permission to “bloggify” our discussion.

I hope you find the information as interesting as I did, and hopefully you learn as much from it as I did!


So why is it that your insurance premium gets increased after you claim for an accident?

It’s quite simple really - insurance philosophy states that the past predicts the future, and we have the numbers to back that up. In fact all insurance is built on numbers. 

We know that someone who has claimed 3 times in the last 5 years is more likely to claim again, as opposed to someone who has no claims over the last 5 years. The lower risk client shouldn’t be penalised and shouldn't have to subsidise this higher risk client. And so we increase the higher risk client’s premium accordingly.

Something else that a lot of people forget is that if the accident wasn’t your fault, you should be claiming from the other persons insurance, and not your own. You can protect your profile by making sure the other parties insurance covers your damages.

The problem is that this is not always possible, since more than half of the people on the road in South Africa are not insured - which means your only choice would be to claim from your own insurance.

I guess then, what you are saying, is that if you want a low premium you should try avoid claiming if you can?

Yes absolutely. 

Practice self-risk management – it’s not advisable to claim for small things that you can manage on your own. Self-insure as much as you can, but when it is a big claim, that’s what insurance is for.

Insurance companies look at claim value, but also claim frequency – if there is someone who claims 
10 times for R5,000, it will make an insurance company uncomfortable. They will say this guy claims too frequently, we don’t know when the big one is coming - but it is probably coming. 

Remember insurance is a business, if you claim too often, the insurance company is losing money. When this happens the insurance company may cancel your policy (and they have every right to). This is known as “insurer cancellation” and if this happens, you are going to have an enormous struggle trying to get insurance anywhere else. One of the first questions any insurer will ask you is if you were previously cancelled at another insurer.

Okay, so say I am thinking of claiming, but I am not sure how it is going to affect my premium going forward. Can I phone the insurer and ask what the implications on my premium would be if I were to submit my claim?

I guess you could, but it may not be that straightforward. Most insurers will only adjust premiums on the annual re-rate. The premium is usually guaranteed for a year, and so any claims in that year will be factored into the annual premium re-rating. We not going to say oh your premium is going up because of your claim, but it will become a factor when the premium is reviewed.

And if you do end up putting in a claim, what are some of the grounds you can be rejected on?

Basically if you have been dishonest, misrepresented your circumstances, or were outside of the law, then your claim can be rejected.

But if you were:
a) honest – you disclosed everything upfront, you didn’t hide anything,
b) abiding by the law - and that includes things like your car being roadworthy (enough tread on your tyres, brakes legal etc.), your car being licensed, the driver being licensed and sober, driving within the speed limits, all of that, and
c) adhering to the T’s and C’s of your policy – for example if you have an alarm, making sure it’s activated that type of thing,

then you won’t have any problems.

And remember if you feel aggrieved or mistreated in any way, the Insurance Ombudsman is always there for the client. Their ruling holds as much weight as a court of law.

Anything else you want to mention that people should be aware of during the claims stage?

Always be honest. 

Remember if you misrepresent an insurance claim, it is considered financial fraud. You will be flagged at all financial institutions. You can’t go get any future car finance; you won’t be able to get a bond. You will have a criminal record - it’s a huge deal.

And remember, inflating your claim is also considered insurance fraud. The problem is some of the service providers are a little dirty. They know it’s an insurance claim, and so they will inflate the repair price to accommodate any existing damage or to work in your excess, or both. A lot of them do it.

If you want to see this in action, go and get a quote from a repair shop and say it’s a cash job, and then send someone else with the exact same vehicle and say it’s an insurance job - see the price difference that comes out.

And the problem is at the end of the day, these inflated prices end up in the premium people pay, and so we all foot the bill for what is essentially a pretty dishonest practice?

Kind of. There is a bit of a shift, especially with the more scientific underwriters, in the sense that the cross subsidy of premiums is not as common anymore. Premiums these days are more individual profile and individual risk dependent than ever before. 

It used to be that if you and I both drive a 2015 Corolla, our premiums should be the same (all other things being equal). But now if I have an accident and inflate my claim (through a dodgy panel beater or whatever) then your premium won’t be affected. The higher claim will make my profile more risky (and not the profile of all Corolla drivers). I had the accident, not you, and so why should your premium go up? 

And so what happens is that I end up footing the bill of the inflated claim through my own increased premiums – because remember a premium increase will be tied to the value of your claim, so if you inflate your claim you will be hit with an even higher premium going forward.

Why do your premiums go up every year even though the value of your vehicle decreases?

I think there is a bit of a misconception around this. The thing is that claims are not always for a write off. In fact a lot of insurance claims are not for the full and total loss. So when you consider all the other claims – cost of labour goes up, cost of parts goes up, etc. So yes, the depreciation of the value of a full loss claim is factored into the annual review, but it doesn’t play as big a role as the increasing costs of labour and parts.

But having said that, when you do get your annual increase, is it worth phoning your insurance to tell them that you’re not happy?

100%. You have to – I just did it now. 

Know that when the anniversary date of your policy comes around, you are going to be phoning your insurance to bitch and moan. They will more than likely give you a discount, because the cost of getting a new client is way higher than the cost of retaining a client – especially if you have a good profile.

I have heard that one of the practices of insurance companies is to give a client a great deal upfront, and take a margin hit, knowing that the premiums will be jacked up in the subsequent years because most people won’t move. Is that true?

Well I can’t speak for all the insurers, but for us the opposite is true. If I look at the maximum discount we are allowed to give someone who has just signed up, it is actually a lot less than what we will be allowed to give someone who has been with us for a few years – especially if they haven’t claimed.

At quote stage, is there anything that you can tell the insurer without them asking you that could result a lower premium?

Generally speaking insurance history is the biggest influence. Often companies will ask you how long have you been insured with uninterrupted insurance. But what they sometimes take into account, but may not ask you, is how long have you been on someone else’s insurance. Being listed as a driver on someone else’s insurance could count toward a lower premium.

Talk to me about excesses, anything you want to mention there?

Okay, excess is insurer specific. Generally the more traditional broker insurances will work on a percentage based excess. You then have a basic excess coupled with a percentage of your claim (usually 5-10%). The problem with this is that, in the case of a write off, this could end up costing you a lot of money. So going in, you don’t know what you could be liable for. If I can give some advice, it's know your excess. 

That way:
a) You can budget, and
b) The worst case is known.

On extremely rare occasions an insurer will allow a 0 excess. But then, if there is a claim, you will find the premium re-rate will spike phenomenally, because the insurer is covering all costs and there is no self-risk management from the client’s side. The client is taking none of the risk and the insurer is covering more of the financial loss.

Also remember that at quote stage, most insurers will give you an excess that their system spits out. But you are welcome to ask for more or less, and the insurer will look into that. 
If you feel the excess is too high, a lot of insurers will also allow you to reduce your excess as you go forward. If you can handle a higher excess – i.e. maybe you have the funds to stomach it, then go for it, because it will reduce your premium.  

Generally there will be a maximum excess though. There is a bit of a moral obligation, we don’t want to go and give a 50% excess on something insured for R2Million. We sort of protecting people from themselves.

Okay, so an excess is sort of like a show of good faith?

Yes, and it also forces people to practice self-risk management. By pure virtue of the fact that the client will need to go into their own pocket, might deter them from claiming. Remember the insurance company doesn’t want you to claim, and so a higher excess means that not only will the claim be less, but there is a lower chance of a claim happening at all. The result of this is a lower premium.

And what are some of your general tips around getting a good premium?

Number 1, be honest. Remember if you battling to afford insurance, or you want to be savvy, or want to try score a little on your insurance premiums, the biggest mistake you can make is to misrepresent yourself in order to reduce your premiums. Because what happens when your claim gets rejected? What’s the bigger financial loss? 

Rather be honest and upfront, and even take a little bit of a knock with a higher premium knowing that if something happens, your insurance will do what it is meant to do, and there is one less thing to stress about. Because that’s the biggest problem, cutting corners here and then suffering later.

Insurance is all based on trust - bona fide, in good faith. We trust you will give us accurate information, and we will entertain your claim based on that information. If you have given incorrect information, we have every right to reject your claim. So first and foremost, be honest.

I would also say that you should think about the underwriting questions you are being asked during the quoting stage. For example, if they ask you if you have done an advanced driving course, maybe it is worth your while to go and do it. 
You will also sometimes be asked if you have a tracking device. Depending on the vehicle, I have seen a premium halve by fitting a tracking device, but then again I have also seen it go down by R5 – it depends what theft profile the car has. So for those types of questions, ask them to check how the answers can affect the premium.

Finally, try minimise your claims. Practice self-risk management. Don’t claim if you don’t have to. If you can handle higher excess, go for it.

And once you have received your quote and insurance schedule, what should you do?

Read it!

It’s difficult to go and accept something over the phone. The way in which the underwriting questions were asked is not always the way in which you may understand it. See what information ended up on your schedule. Make sure everything is correct.

Check your conditions of cover. Additional excess is a big one that people miss – non regular driver excess, excess for the driver being inexperienced, etc. Make sure you know what you in for if you need to claim.

Also, always check the Rand value that your vehicle is insured for (just keep in mind this value changes monthly as the vehicle depreciates) but also check who determines that value. Generally, the value is given by TransUnion which is usually pretty accurate in terms of the replacement cost. But some of the insurers use other valuation systems. For example, I know of someone who had a write off and their insurer was using a slightly different valuation system, and the vehicle value was given as 20% lower than what the actual TransUnion value was.

And then finally, leave us with your number one tip

I would say claim as little as you can.

If your damage is cosmetic, do you really want to pay over your excess and affect your insurance history with a claim? Again, the past predicts the future, if you claim more it means we’ve paid you more, it means we not getting as much from you as what we want. If you want the best deal on your premium, the biggest factor is going to be your claims history, so try keep that as clean as possible.

Till next time, Stay Stealthy!
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