Why insurance premiums increase

 ‘Why do insurance premiums continue to increase while the value of the insured item decreases?’ This question was recently posed to Justmoney, specifically looking at the cost to insure cell phones and vehicles.

Cell phone insurance

Santie Stevens, key individual for the short term division of Insurance Busters, pointed out that cell phones are a high risk item to insure. “We encourage people to self-insure these items, unless the item is over R10, 000.”

When it comes to the cost of replacing a cell phone, this increases if the specific cell phone insured has been taken off the market. This means that the replacement phone will be an upgrade of the phone insured.

However, when you purchase a cell phone, you will initially insure it for the amount that you purchased the phone for. However, as time goes on, you can negotiate with your insurance company to lower your insurance premiums (and the sum insured), as the value of the phone decreases.

“The factor the customer must consider is that the specific phone may cost less to replace now, but if the phone is discontinued and the upgraded phone is in the market, the upgraded phone may be more expensive and the customer may face a financial loss as the insurer will only pay out the insured amount stipulated on the schedule less the excess,” highlighted Stevens.

When considering cell phone insurance, Stevens noted that it is advisable to consider standalone cell phone insurance, as this is often more affordable and excesses are lower compared to a standard personal lines insurance policy.

“All money received is paid into a claim pool. If an insurer reviews its pool after 12 months, and it comes to light that under the cell phone section the loss ratio for that specific company was, for example, over 70% then the insurer will be obligated to increase the rates on cell phone insurance cover to ensure that there is enough money available in the claims pool to pay any future claims that may be made. Should the loss ratio, for example, be less than 10% then the insurer may decide to keep the rate being charged unchanged or even consider decreasing the rates,” explained Stevens.

She added: “Remember as well, that if a client claimed against his insurance policy for a cell phone, the rate will increase for the year ahead.”

Vehicle insurance

Stevens pointed out that vehicle insurance works slightly differently to cell phone insurance. “Various factors are taken into consideration when calculating the rate to insure a vehicle. The actual value of a vehicle is but a one percent factor when calculating rates.”

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Among the factors that are considered when taking out car insurance is the cost of importing parts for the vehicle. Stevens highlighted that with the weak Rand, the cost of importing parts is becoming increasingly expensive.

Weather is also a consideration. “Other factors that must be taken into consideration is the weather patterns. For years the hail storms were not bad, but then three years in a row the amount of claims made for damage caused by hail storms to vehicles spiked to over 200%. This depleted the claims pool from where claims are being paid out. This has caused all insurance companies to increase their rates due to all insurance companies suffering huge loss ratios due to the hail storms.”

However, if an insured has never had a claim, the insurer may reward this client with a cash back bonus or no claims bonus discount.

“When an annual review is done on a policy, the insurer will look back at the last 12months, if the increase is, for example, must be 20% to ensure sufficient is available to pay claims for the 12 months to follow. A customer who did not submit any claims against his vehicle section of the policy will, for example, only receive a 10% increase. Again this varies from insurer to insurer, as certain insurance companies will only take on specific risks depending on the boundaries that were set to them by their re-insurer,” said Stevens.

Furthermore, Stevens emphasised that 70% of vehicles on South Africa’s road are not insured, while at the same time the country has one of the highest accident rates in the world. As a result of this, Stevens highlighted that those who are insured will end up paying more.

Lastly, the history of the driver will also play a factor in determining the insurance premium. These include: the length of time the driver has had their licence, the area where the car is park and the security, and previous claims against the policy.

“As you can clearly see the value of the vehicle has a very low impact on the increase of rates and the fact that the vehicle’s value is depreciating does not mean that the parts on that vehicle become cheaper at the same time,” explained Stevens.

She added: “That is why, depending on the specific insurance company, many will not insure a vehicle if it is older than 10 years on comprehensive cover, as it just becomes too expensive. There are one or two that will insure a vehicle for up to 20 years of age under a comprehensive insurance policy, but 99% of the time, if the vehicle just has a dent after an incident the insurer will write off the vehicle as it is uneconomical to repair.”

Handy tip: To ensure you are covered in the event of an accident, apply for car insurance.