You get what you pay for in insurance
Peter Atkinson, National Technical Portfolio Manager at the Financial Intermediaries Association of Southern Africa (FIA)
Consumers should be wary of signing up for what are perceived to be cheaper insurance products without first reading the fine print, as they can actually prove far more costly in the long run.
According to a recent statement by the Ombudsman for Short-term Insurance, consumers should satisfy themselves, prior to inception of any contract, that the policy being offered covers their specific risk needs and not be “fooled” into purchasing an insurance product purely because it offers a lower premium.
In particular, the Ombud referred to a relatively new motor policy, noting that some insurers have introduced forms of insurance cover at what is said to be substantially reduced premiums, supposedly in an endeavour to reduce the number of uninsured vehicles on our roads. He pointed out that such products may not offer much protection to consumers, however, and may actually lead consumers into a false sense of security.
It is critical that consumers analyse the cover provided by such products very carefully and critically assess whether the cover being provided is relevant to their own circumstances and whether they are able to carry the potential consequences of excluded risks themselves.
Insurance premiums are calculated to compensate the insurer for taking on a certain amount of risk that is being transferred from the insured. Therefore, a lower premium often means that the degree of risk being transferred is correspondingly low. Unfortunately, those seeking to cut insurance premiums are typically the ones who can least afford to carry any of the risk themselves.
For example, it is important to work out how the insurer will determine the value of the vehicle at the time of a claim. There can be a significant difference between the “trade value” and the “retail value” of a motor vehicle, which may leave a consumer with a large shortfall in the event of total loss, especially if their cover only provides a percentage of the full trade value in an effort to save on premiums.
The “trade value” would represent the value that a dealer would offer as a trade-in on a motor vehicle and should be distinguished from either the market value of the vehicle, or the retail value, which would represent the value for which a vehicle would be sold by a motor vehicle dealer to an end purchaser. However, some plans do base the cover on “market” value
In what appears to be a new trend, however, some cover now extends only in the event of a complete loss of the vehicle through write off occasioned by an accident or through theft or hi-jacking. No cover is offered to a consumer for damage to the vehicle itself where the vehicle is not assessed as a write-off based, for example, on repair costs being estimated to be greater than 70% or 80% of the vehicle’s current value.
While one may be tempted to simply disregard this type of “limited” product (if one is able to discern it as such), consumers also need to be able to choose a product that suits their particular needs from the range on offer and, provided they are fully informed as to the pros and cons of the cover, to opt for what is perceived to be the best solution.
It is here that the independent intermediary can be invaluable in ensuring that the options are fully understood and that the correct decision is made.
Coutesy: FIA
