Insurance excess is a term that often confuses policyholders. It refers to the amount of money you have to pay out of your own pocket in case of an insurance claim. The higher the excess, the more you are required to pay upfront before the insurance company covers the rest. This article will delve into why insurance excess is so high and what factors contribute to this cost.
The primary reason for a high insurance excess is the risk factor associated with the policyholder. Insurance companies calculate premiums based on the likelihood of claims being made against the policy. If a policyholder has a history of making claims or has a higher risk profile, they may be charged a higher premium. To offset this risk, insurance companies set a higher excess.
Another factor contributing to the high excess is the type of insurance coverage chosen by the policyholder. Some types of insurance policies come with a higher excess than others. For example, comprehensive car insurance typically has a higher excess compared to third-party only insurance. This is because comprehensive insurance covers damage to your own vehicle as well as other vehicles, which increases the potential for large claims.
Additionally, the value of the insured item also plays a role in determining the excess. Higher-value items like houses or cars usually come with a higher excess. This is because the potential payout for such items is significantly higher, and the insurance company needs to ensure that it can cover these larger claims without running into financial difficulties.
Policyholder behavior also impacts the excess. If a policyholder files multiple claims or makes claims for minor damages, their premiums and excesses may increase. Insurance companies use actuarial tables to determine how likely a claim is to occur based on past data and current conditions. If a policyholder's behavior suggests a higher likelihood of claims, they may face higher premiums and excesses.
Lastly, changes in the insurance market and regulatory environment can affect excess levels. In some cases, insurance companies may adjust excesses to reflect changes in their underwriting practices or to comply with new regulations. These adjustments can result in higher excesses for policyholders.
Despite the reasons behind high insurance excesses, there are ways to reduce them. Policyholders can improve their risk profiles by taking steps to reduce the likelihood of claims, such as maintaining a clean driving record, keeping utilities like smoke detectors and alarms updated, and ensuring homes are secure. They can also choose lower excess levels by selecting appropriate coverage types and limits.
It's important to note that while reducing excess can save money, it does not eliminate the need for insurance. Insurance is designed to protect policyholders from unexpected events that could result in significant financial losses. By understanding the factors that influence excess levels, policyholders can make informed decisions about their coverage and manage their risks effectively.
In conclusion, insurance excess is determined by various factors including the risk profile of the policyholder, the type of coverage chosen, the value of the insured item, and changes in the insurance market. While it may seem costly, excess is necessary to ensure that insurance companies can cover large claims without facing financial difficulties. Policyholders can take steps to reduce their excess levels by improving their risk profiles and choosing appropriate coverage options. However, it's essential to remember that insurance is a safety net designed to protect against unforeseen events, and paying a higher excess is a small price to pay for that protection.