Last week I mentioned that the short-term insurance industry had agreed to a demand from National Treasury that the insured value of motor vehicles be reduced in line with their market value. For years, many short-term insurers have simply maintained vehicle values at purchase price, thereby levying a higher premium, but considering only the reduced market value of vehicles when it comes to claims.
This practice means wasted money on premiums for policyholders but better profits for short-term insurers and more commission for salespeople, because the commission is based on a percentage of the premiums.
In the column, I mentioned that Santam had voluntarily stopped the practice last year and that Outsurance had always kept insured values in line with market values of motor vehicles.
This elicited some sharp replies from readers, saying this was not true. The problem was that these readers, some of whom were quite angry, had not seen their premiums decrease in line with the reduced insured values – in fact, many had seen their premiums increase.
Reasons that motor vehicle premiums continue to increase, even when vehicle valuations are reduced, are the ever-increasing costs of repairs and some protective practices by the motor vehicle industry.
For example, most motor vehicle companies insist that warranties will be valid only if you use their branded car spares for repairs (and often only if you use their preferred repair shops). As everyone knows, if you had to build a motor vehicle using the vehicle manufacturer’s spare parts,you would probably pay about 10 times or more (a thumbsuck figure, but probably not far off the mark) than the vehicle would cost off the shop floor (see box on high repair costs, below).
Anyway, I asked Ernst Gouws, chief executive of Outsurance, to explain how his company does its premium calculations. I assume that it would be pretty much an industry standard in cases where the valuations of a motor vehicle are reduced every year.
He says: "We insure a client’s car for its current retail value as per the Auto Dealers’ Guide. This is the best gauge of the amount of money the client would need to buy a similar vehicle should the car be written-off or stolen. So the client does not specify the sum insured on which he pays cover."
When calculating the premium to provide comprehensive cover on the actual value of a vehicle, the following factors are considered:
* The probability of the insurer having to pay out the full (reduced) retail value to replace a car that is written-off in an accident or stolen. Gouws says the actual retail value of the car has a direct bearing only on cover for replacement but not on the other factors taken into account in calculating premiums.
"When we perform an annual renewal, we do reduce the retail value of a vehicle (in line with the Auto Dealers' Guide) and this does reduce the amount of premium we need to cover the replacement."
* The probability of an insurer having to repair the car following an accident (and the likely severity of the accident and damage caused). This includes damage to a car’s windscreen.
* The probability of the policyholder being found liable for damage to a third party’s property. The standard amount of liability cover included in an Outsurance policy for comprehensive cover is R5 million.
Gouws says the premiums needed to cover the second and third factors are directly influenced by a number of inflationary pressures. These are:
* Increases in vehicle part prices (with imported parts further affected by exchange rates);
* Increases in paint prices; and
* Increases in labour rates charged by panel beaters.
Gouws says the premium needed to replace a written-off or stolen car constitutes a rather small portion of the total premium paid by a client. And this portion decreases further over the duration of cover as the value of a vehicle comes down.
The cost of accident repairs and liability claims make up the bulk of your insurance premium.
Even the internal costs of an insurer to administer a policy increase over time.
Gouws says that, as a consequence, most motor vehicle owners who are comprehensively insured “still incur an increase in their car insurance premiums every year, even though the car’s retail value has reduced.”