Better way to set insured value

All too often it seems the financial services industry is quite content to show its customers, its critics and even government the finger – arrogantly. The industry has numerous pro-ducts and product designs out there that are just plain unfair and/or a rip-off.

But every so often individual com-panies see the error of their ways and change. My column this week is about how Santam has halted an ongoing unacceptable practice in motor vehicle insurance.

Personal Finance has campaigned for many years against the way short-term insurance companies every year automatically increase the value of your household goods by inflation or more while maintaining your motor vehicle at its purchase value, despite the fact that it is reducing in value (initially, quite dramatically), and when a total loss occurs, insurers pay out only the actual, lower retail value.

I recently raised the issue for the umpteenth time – more to irritate than with any hope of effecting a change.

Personal Finance received a complaint from Reader X, who had asked Santam to reduce the insured amount of his Honda Accord from R200 000 to R175 000, because he knew from previous experience that an insurer will pay out only the retail value of a vehicle, and not necessarily the insured value, at the time of a claim.

In an exchange of correspondence, Reader X asked Santam why it “increases one’s household contents value automatically by 10 percent each year and does not decrease/adjust one’s motor vehicle insured value at the same time”.

The unedited response was: “We do not decrease the value of your vehicle as we only have an estimated retail value. Clients therefore choose to value their own vehicles as there are times when your vehicle is in an excellent condition and you are able to get more than what our system states.

“We insure vehicle’s for retail value. Our system is connected to Mead & McGrouther Auto Dealer’s Guide. If you think your vehicle valued more that the retail value, you can provide us with a valuation certificate from a dealership and then we can increase the value.

“At a claim we will pay out the retail value (or value according to the valuation certificate), depending on the condition of the vehicle.”

The reason for this ongoing rip-off is the abuse of the percentage system. Insurance premiums correctly should be based on, among other things, a percentage of the value of your insured possessions. When the value is inflated, as is the case with motor vehicles, the insurance company is making an unfair profit.

But what makes it worse is that the financial adviser is being paid a percentage commission of 12.5 percent of the insurance premium. So there is very little incentive for the adviser to ensure your vehicle is valued properly – despite the fact that this is a contravention of the Financial Advisory and Intermediary Services Act, which requires your adviser to act in your best interests.

Expecting the same old run around when I again raised the subject, I was astounded when Santam’s chief executive, Ian Kirk, replied that Santam has been busy revising its policy on the issue since Personal Finance had raised it last year. Kirk says: “Before the end of the year, Santam will modify its systems to automatically adjust the annual depreciation value of all motor vehicles insured by the company.”

Kirk says Santam has, for many years, catered for the fact that some brokers annually adjust their clients’ vehicle values. Some, however, don’t, and Santam manages that by reducing the impact of the sum insured on the premium calculation. “The reason we do this is to ensure fairness to all our clients by ensuring that those who don’t adjust their values are not subsidising those who do adjust their premiums.”

Kirk says the new system that Santam is developing will ensure that Santam updates the depreciating value of the vehicle and will ensure your insurance premiums are automatically adjusted accordingly and in line with the updated retail values in the Auto Dealers’ Guide.

“We understand our customers’ concerns around adjustments, as this has a bearing on the affordability of insurance for the average car owner,” Kirk says.

But do not expect your premiums to fall by the same percentage as the fall in the value of your vehicle.

Kirk says insurance modelling, especially when it comes to premium calculations, is based on a much more complex set of underwriting criteria than just the book value of the vehicle.

“I would want to stress with our customers, however, that in our view no two vehicles or vehicle owners are the same.”

He says not all vehicles and drivers are equal, and not all claims are for the scrapping of a vehicle. You must bear in mind that the cost of car parts does not depreciate annually, and currently this is the most significant factor that goes into calculating your premium.

Kirk says it is unfair to assume that everyone is the same. To ensure that all customers are treated fairly, besides the book value of the vehicle, Santam’s actuarial model takes into account a number of factors, including:

* The type of vehicle and the manufacturer;

* The age of the vehicle;

* The power-to-weight ratio of the vehicle;

* The value of the vehicle;

* The claims history;

* The location of the vehicle;

* The age of the driver; and

* The costs associated with car repairs and parts.

Kirk says you should check annually whether or not you are correctly insured. The danger is that you may be under-insured if you do not update information about your vehicle with your broker or Santam – for example, modifications to your vehicle in the year before the annual adjustment that can impact how your premiums will be calculated.

“A modification to enhance a vehicle’s performance may increase the car’s risk profile, whilst an advanced alarm system may lower it,” Kirk says.

Well done to Santam on this. Hopefully, the rest of the short-term insurance industry will now follow its example!