Why do Insurance Premiums Differ?

The question is: “Why can another insurer just reduce my premium by R1 300 from what I am currently paying?”  In the full context it is a drop from about R5 000 tot R3 700. It is about a 25% drop. That is a lot.

Revisiting Insurance:

To understand the importance of the question, let’s quickly step back and look at what happens in insurance. Remember, insurance is a system of spreading the risk of one over the shoulders of many. Nobody should carry a heavier load than other people. Nobody should benefit at somebody else’s expense.

Underwriting the Risk:

Insurance Premiums

Fire = low probability * high cost

What the insurance company considers the risk of the item that they insurer. Insurers have all the data to know that a thatched roof house has a higher risk than a corrugated iron roof. Insurers can tell you exactly what the probability is of a White Volkswagen Golf in a specific neighborhood to be stolen on a Tuesday night. That is why some vehicles carry a higher premium and some color vehicles get charged more.

Insurers can also confirm that women drivers are a safer bet than men. That people with a license less than 2 years are more prone to accidents.

The risk matrix plots the likelihood of an event happening against the likelihood of it happening. Houses burning down is not a regular event, but when it does happen, the cost is high. Burglaries happen much more frequently than fires, but the cost is much lower than with a fire. And this risk to cost ratio is how premium rates are calculated.

Example:

I am currently paying R322 per month for my house (Building) insurance. If another company offers me a premium of R241, my immediate question would be:  “How can they offer me a 25% discount just like that?

It could be that my current insurer is really nailing me and I am carrying a heavy load for other people who claim too much. It could be, but it is not necessarily true.

It could also be that my current insurer covers things that the new insurer does not cover? As I have said regarding Pool Pumps, some insurance companies offer the cover as standard and others you have to ask and pay for it – you will have to study and compare policy wordings to be sure about that.

Insurance PremiumsIt could also be that my current insurer is more likely to pay a claim than the new company? It is the difference between finding reasons to pay as opposed to finding reasons not to pay. An example would be an insurer who refuses to pay a motor accident claim because the client parked the vehicle on the wrong side of the vibracrete fence! (The risk address on the policy was 2 Tree Street  and because the client did not have a gate yet, he parked his vehicle at  4 Tree Street (the neighbor) behind a gate. Because of that an accident that happened in another province was not paid.

Or what do you make of this repudiated claim?  The vehicle was parked in the yard and somebody collided with the car. The claim was repudiated because the vehicle’s tires were under the legal tread limit! To the best of my knowledge the Ombud decided that worn tires did not contribute to the claim and the insurer had to pay the claim. (If the same claim came from an accident in a parking lot, it would be different.)

It could be that the excesses are different.

Would you change insurers to save a R100 per month on a car if your excess changes from a flat R2 500 to R8 000?

Conclusion:

Having said all this, let me conclude with three things I have learnt:

  1. Normally the companies that I deal with and who compare well on policy wording and claims payment, have more or less the same premiums. It is in the ball park.
  2. Often, when a client was with a company for a long time with a good claims history, it is impossible to beat the premium, unless you take him/her to a company that I do not want to deal with – those that just reduce premiums to get a client.
  3. Sometimes, even with the companies I refer to in #1, I am surprised by what margin premiums differ and then, for some reason, you do get surprisingly good premiums.

To Summarize:

Before just accepting an insurance quote:

  • Compare policy wording to ensure you do not forfeit cover;
  • Compare excesses to ensure that claims are not limited because of high excesses;
  • Look for caps on covers – for instance, is there a cap to resultant damage because of a burst geyser?
  • Is it a company who try to pay claims? All valid claims will be paid; no invalid claim should ever be paid – that is a fact. At the same time, when I look at the claims that cross my desk, I can find reason not to pay many of them – like not paying for an accident in KZN, because the vehicle was parked at number 2 instead of nr 4!

The Last Story

My late father was a building contractor. An architect told him:  when the tenders come in, you throw away the lowest one. He will go bankrupt on you. Then you throw away the highest one. He wants to get rich quick at your expense. Then you will find the rest is more or less the same.

Sage advice.

What is your experience? Share it with us and please leave your short term insurance related questions in the comments or send me a mail.

 

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