Excess payments are among the most contentious aspects of car insurance. Here are answers to common questions about insurance excesses and tips to check on whether you have the right policy for your risk exposure and your pocket.
What is an insurance excess?
The excess is an amount of money that will come out of your pocket when you claim against your car insurance. For example, if you have an approved claim of R100 000 and your excess is R5 000, you will pay R5 000 and the insurer will pay R95 000. If your excess is R5 000 and the cost to repair to damage to your car is less than R5 000, you will need to pay the full amount.
Why do insurers charge an excess?
The excess is a way for insurers to ensure that the cost of premiums remains affordable. Without an excess, insurers would need to process high volumes of small claims, which in turn would mean it would be necessary for them to charge higher premiums.
Excesses lower the insurer’s administrative costs since customers won’t claim for every small scratch or ding to their car. This is important for traditional insurers, who need to run large back-office teams and infrastructure to handle claims.
They give customers a financial incentive to take care of their vehicle, since they will also need to pay towards repairs if they’re involved in an accident. They discourage people from making multiple claims that could reflect badly on their claims history.
Why should you look out for in the fine print about excess payments?
Often, signing up for lower monthly premiums for car insurance will mean that you will need to pay a higher excess in the event you need to claim.
Most insurers are transparent about the basic excess, which may be up to 10% of the value of the damage to your car in an accident or of the total value of the car if it is stolen or written off. However, many insurers also impose extra excesses if any of the following are true:
The driver is younger than 25.
Someone besides the regular driver was at the wheel at the time of an accident.
The accident occurred between 10pm and 5am.
You were involved in an accident in the first six months of the policy.
The accident did not involve another car.
Read the fine print carefully since a combination of these excess charges could add up to you paying a total excess of R40 000 or more. On the plus side, some policies have low or zero excesses for certain claims, such as hail damage or windscreen replacement.
What happens if you were not at fault in an accident?
In theory, your insurer should aim to recover your excess from the driver at fault or his/her insurer and refund the money to you. In practice, 70% of cars are uninsured in South Africa, many of the drivers are unable to pay the damages, and the amounts are so small that it’s not worth pursuing legal action to recover the money. That means there’s a good chance you’ll still pay the excess when the accident is not your fault.
So how do I find the policy that meets my needs?
You should consider the following factors in your decision:
The value of your car – a good guideline is to aim for an excess lower than 10% of its insured value.
Your cashflow – how able are you to pay for small repairs out of pocket? Can you afford to put aside R5 000 to R10 000 a year to cover repairs for small incidents?
The type of damage and risk your car is exposed to – for example, does it spend most of the time in the garage or do you spend a lot of time on the road?
As long as you know what the excess is and can afford it, you do have the option of paying a lower premium and taking the risk of a higher excess.
Ernest North is co-founder of Naked, a fintech insurance company.