Excess in car insurance: is it profitable or is there a catch?
When taking out a Casco policy at the insurance companies, a car owner is sometimes offered to save money and to consider an insurance option with excess. Many people are baffled by this. How? Do the insurers reduce their profits? There must be a catch. We did the math and looked into it with the experts.
Excess on the rise.
Excess is the part of the sum insured that the car owner pays for possible damage at his own expense. The amount of the deductible is determined when entering into a contract with the insurance company. The scheme works like this: if the loss is less than the deductible, the repair is paid by the car owner from his own funds. If the loss is higher, the insurer pays the rest.
Deductible in auto insurance was legally defined on January 21, 2014 – when amendments to Federal Law No. 4015-1 “On Organization of Insurance Business in the Russian Federation” came into force. Although this financial instrument appeared in the country long ago.
As Alexander Mikhailov, senior vice president of the auto finance company Europlan, explains: “Franchises appeared on the market more than ten years ago, but have become widespread in the last three years. It was difficult to explain to sellers and clients the benefits of insurance with a franchise, to establish cooperation with service stations in the settlement of franchise losses. But when people “tried it out”, the popularity of franchises began to grow very quickly.
Increased interest in the economic Casco occurred at a time when Russia was “covered” by another financial crisis, and the cost of insurance policies, increased.
“Because of the fall in the ruble exchange rate the cost of spare parts increased, and insurance rates followed. Only since the beginning of 2015, hull insurance policies have risen by 10%-30% on average, depending on the make and model of the car, becoming for many an unaffordable luxury. As a result, the sales of policies collapsed by more than 30%”, says Yuri Strekalov, head of SOGAZ JSC Car Insurance Underwriting Department.
The economic crisis, which “hit” the incomes, made car owners reconsider their attitude towards hull insurance. Some decided at their own risk to limit themselves to policies of MTPL, while others became interested in the new proposal of insurance companies. The banks that issue car loans have also changed their views on auto insurance. According to Yuri Strekalov “previously they rarely agreed to insurance with a deductible. If a car owner cannot pay even small damages to the car, it will affect the market value of the collateral. The situation has changed, and “banks, which have lost a significant part of their profits from policy sales, have also become more loyal to products with deductibles.
Ilya Grigoriev, head of the underwriting department of AlfaStrakhovanie, says about another reason why insurance companies actively offer their clients a CASCO contract with a deductible: “The macroeconomic situation has changed people’s behavior. In conditions of uncertainty they tend to upgrade their cars at the expense of insurance companies. As a result, the frequency of damage claims has increased.”
Experiment: Casco insurance with and without deductibles
To test the benefit of a deductible, we decided to “insure” a hypothetical used sedan, and called a couple of insurance companies: “Ingosstrakh and INTOUCH. We were asked to make a preliminary calculation of the cost of a hull insurance policy – with and without deductibles. The result: at Ingosstrakh the full insurance policy costs almost 49 thousand rubles for the first case, and almost 37 thousand rubles for the second one. – In the second case. Deductible amount is 10 thousand rubles. You will have to pay it for the second insured event. The first time, the company repairs the damage on the car at its own expense.
At INTOUCH, the client is offered to choose a threshold above which the company will pay for auto repair at its own expense: 10, 20, 30 and 50 thousand rubles. Deductible is applied from the first insured event. The cost of KASKO policy in our case was: with deductible – 25 thousand rubles, without it – 48 thousand rubles.
Saving on the neat.
At first sight the benefit for the client is evident. In our case the difference in policy value between different insurance companies was 12 and 13 thousand rubles. What is the benefit for insurance companies?
Ilya Afanasiev, managing partner, lawyer of Antistrakhuschik is convinced that “the main reason why policyholders are offered a deductible is to reduce the risk of petty losses, such as damaged windows, small scratches on bumpers and abrasions on body parts.
And it’s true: owners of a KASKO policy (without a deductible) could apply to the insurance company several times a year to, for example, paint the bumper, which had scuffs. But with a cheaper KASKO policy (with a deductible), the car owner will think about it and decide that he or she can drive with a scratched bumper. After all, the cost of its repair is likely to be lower than the deductible amount indicated in the contract. Hence the conclusion: the insurance company bears less money to repair your client’s car. And the client, in turn, will try to drive more carefully.
Who benefits from the deductible
Drawing up a KASKO policy at reduced cost, thanks to the franchise is beneficial to experienced and careful drivers who show accident-free driving. Alexander Mikhailov believes that this solution is also suitable for “owners of cars that are not new and are ready, if necessary, to have it repaired by someone other than an official dealer. That is people who claim less than one insured event on average.
Who does not benefit from deductibles
There are many of them: inexperienced drivers, the so-called “snowbirds” – those who get behind the wheel only in the snowless season, reckless drivers. There is another category of motorists who should not accept a deductible. Alexander Tsyganov, Head of the Department of “Insurance Business” of Financial University under the Government of Russian Federation, Doctor of Economics, Professor says: “There is an interesting example of insurance statistics, which were analyzed in relation to drivers, young mothers. It turned out that for these categories of drivers there is a significant increase in losses due to minor accidents related to paying attention to the child sitting in the back seat and distraction from the road situation.”
Which deductible to choose
Besides the unconditional deductible, there are other kinds of deductibles: the conditional deductible, deductible from the second occurrence, and the time deductible.
Conditional deductibles have not “caught on” among Russian motor insurers.
Aleksandr Mikhailov explains: “Conditional deductibles in auto insurance are utopia. Let us consider a real situation: the client has a car with conditional franchise of 15 thousand rubles. If the loss is less than 15 thousand rubles the client pays the insurance company, if more – the entire amount. For example, the client scratched the bumper which costs 10 thousand roubles to paint. What should he do? A perfectly honest client will pay for the repair himself. An unreliable client will most likely deliberately add a little extra damage (for example, by damaging the fence), so the bumper would have to be replaced completely. For the fraudster it is a direct saving of 10 thousand rubles, for the insurance company it is a loss of about 50 thousand rubles. If you deduct 15 thousand rubles from each insured event with an unconditional deductible in any case, the client would not be tempted.
The deductible from the second claim, that is what we were offered when we called Ingosstrakh, suggests that the first claim is fully compensated by the insurer, and the deductible starts working from the second claim and further on.
The deductible is deductible in auto insurance only if the car owner is at fault for the accident. If the accident is the fault of the other driver, the insurance company will fully reimburse the damage.
Temporary deductible is based on the fact that the insurance company reimburses the damage only at certain times – for example, on weekdays. If an insured event occurs on a weekend, the client pays for the repair of the car himself.
In fact, insurance companies mostly offer unconditional deductible, sometimes selling the deductible from the second case.
Ilya Afanasiev explains it this way: “An unconditional deductible is much more profitable for the insurer than for the client. Insurers cover themselves with the fact that the deductible gives the insured a discount on the purchase of the policy.
Will the deductible grow?
The past year has clearly demonstrated how against the background of the unstable economic situation the cost of car insurance quickly skyrocketed. And immediately the car owners were offered the “ring of salvation” – excess, as a way to cheapen the KASKO policy. Will it always be like this? Or will its cost increase too? Aleksandr Tsyganov explains: “Deductibles are usually formed as a percentage of the cost of the policy. If its price goes up, deductible will also grow – that is in absolute numbers. If the deductible is conditionally tied to the cost of repairs, like the price of painting 1-2-3 simple parts, its size will objectively grow with it.
Whether to use a deductible for auto insurance or not is not an easy question. Of course, the main factor in making a positive decision will be the cost of the KASKO policy. But if it turns out to be appropriate, do not rush to insure your car right away – read the feedback about the insurance company. What if it just sells policies and is not burning with the desire to compensate you for damage? And in order to obtain compensation, you will have more than once to argue and assert your rights. And of course, honestly admit to yourself how careful driver you are. Do family members have access to the controls? Will they be attentive behind the wheel? If there are more positive answers than negative, then with a deductible you can save on a hull insurance policy. Have an accident-free ride/
How a hull insurance deductible works
The article tells what a hull insurance policy with a deductible, reveals the pros and cons of policies, gives a characteristic of certain types of deductibles.
In order to protect the car from theft and damage, car owners take out a hull insurance policy. The cost is determined by the make of car, the experience of the driver, the presence of a built-in alarm system and other factors. When the price of the policy is high, it is advantageous to issue a contract with a deductible. What is a CASCO insurance deductible? For the vehicle owner it means saving money on insurance while retaining the guarantee to receive payments for expensive repairs or the loss of the car. For the insurance company, it is a chance to reduce the number of claims related to minor non-serious breakdowns, where the amount of paperwork often exceeds the insurance indemnity.
What is an insurance deductible?
Agents don’t tell car owners in detail what a hull insurance policy with a deductible is. As a result, such contracts still cause a lot of questions. Although this instrument for reduction of policy cost and elimination of unnecessary bureaucratic procedures has been used in Russia and other countries for a long time. According to the adopted terminology, it is an exemption of the insurer from reimbursement of a part of the policy holder’s losses to the amount specified in the contract.
Excess in hull insurance – what is it in simple words? It is the sum that the driver will not be paid in case of an insured event. The exact amount is determined when drawing up the policy. For example, KASKO insurance with a deductible of 30,000 rubles means that the car owner will pay for the restoration of the car within this amount by himself. The repair may be more expensive. Then the insurer will pay only for the work that exceeds 30,000 rubles, or the entire cost, depending on what is fixed in the contract.
When taking out an insurance policy, you need to clearly understand what the deductible for a hull insurance policy means: the pros and cons. It is necessary to compare the savings on the price of the insurance premium, the value of the exemption from reimbursement of losses, and to assess the possible repair costs. Figuring out what a hull insurance deductible is and how it works, you can pick up a favorable tariff.
Conditional or unconditional deductibles are the most common.
- Conditional franchise in KASKO means that the company will pay the damage with one condition: if the losses exceed the amount prescribed in the contract. For instance, if the amount in the contract is 30,000 rubles and the replacement of needed parts cost 10,000 rubles, then there is no point in going to the insurers. If the work cost 36000 rubles, the car owner will get it in full from his insurance company. This type of deductible is now used less frequently than before. Too many fraudsters are trying to get compensation illegally.
- Unconditional deductible in hull insurance. When there are no specific conditions in the contracts, the deductible is automatically regarded as an unconditional deductible. A citizen can claim from the company to reimburse the costs above a certain amount. If we take the previous example with a repair price of 36,000 rubles and a deductible of 30,000 rubles, the driver has the right to demand compensation of 6,000 rubles. The rest of the money will have to be paid independently.
The same principle works when the amount of the deductible is set as a percentage of the value of the loss. But more often this method of calculating the deductible is used not for damage, but for theft or total loss of the car. The amount of the deductible is up to 10 percent of the value of the vehicle, taking into account wear and tear.
Other types of deductible
Insurers offer other types of deductibles in KASKO policies, among them:
- Temporary (payment of compensation if an insured event occurs at a specific time, such as on weekdays);
- Reduced deductible (compensation in case the car owner is not guilty of causing the loss);
- high (coverage of expensive losses by the insurer with subsequent reimbursement from the car owner);
- Regressive (with increasing deductible the cost of the policy decreases).
Each type of deductible in CASCO insurance is beneficial depending on the experience of the driver, the brand of vehicle, the conditions in which a person has to travel. For example, a temporary deductible will be a way to save money for people who park their car at the weekend. Owners of trucks or cars with expensive maintenance will choose a high deductible.
A dynamic deductible from the second insured event will be appreciated by experienced drivers who rarely get into trouble on the road. The first time, the insurer will fully reimburse the repair costs. The second time, the amount of the exemption increases and grows with each subsequent application. Some motorists, having drawn up such a contract, do not rush to their company with minor breakdowns. It is more profitable to repair the equipment yourself, and go to the insurance company only if serious repairs are required.
Advantages of insurance with a deductible
Here are a few basic benefits that are common to almost all contract options.
- Reduces the cost of purchasing hull insurance policies, including for young or inexperienced motorists whose driving experience does not exceed 3 years. They have a higher risk of getting into an accident than people with more driving experience. That is why insurance companies’ services are more expensive for them. A deductible allows you to optimize your expenses.
- They provide an actual opportunity to insure against total loss or theft of the vehicle. Insurers often refuse to sign contracts with limited risks so as not to reduce the cost of the policy. Hull insurance with a large amount of exemption will provide the driver with a guarantee to receive compensation for the loss of the vehicle.
- Allow you to keep the accident-free discount, because the cost of minor repairs is paid by the car owner.
- Save time. The driver does not need to gather documents from the insurance company when it is cheaper to repair the vehicle himself/herself.
- Encourage compliance with traffic rules on the road, so you don’t have to cause accidents and pay for part of the damage. If the accident is the fault of the other motorist, you can recover the deductible amount from him.
Some KASKO contracts allow you to buy it back. A person who has insured his car has the right to return to the insurance company the money he saved by paying for the policy. In return, the insurer reimburses the full damage. This is beneficial when expensive work is needed to restore the car.
If you do not carefully study the terms of the contract, the benefit will only go to the insurance company. Among the possible disadvantages are the following:
- Large repair costs for a large number of insured events, because of which the savings on the payment of the policy may not justify itself.
- You are not always provided with a full KASKO package, some operations may be excluded from it, for example, replacement of the windshield or headlights.
- Impossibility to conclude a contract for a car purchased on credit.
- Possible abuses on the part of insurance companies, connected with the determination of the amount of damage. Customer will have to order an independent expertise.
- Not suitable if there is no money to restore the car.
Accident rate and occurrence of damage is affected by broken roads or poorly lit streets, the presence of traffic lights or equipped sidewalks.
If you are doubtful about your ability to provide accident-free driving, it is better to take out a regular Casco policy. Then the insurer will undertake the risks and will compensate for the damage in full.
The conditions of concluding an automobile hull insurance policy differ from company to company. The car owner should carefully analyze the offers and choose the most favorable for him. You should sign a contract with a reliable company. Otherwise, a voluntary auto insurance policy will not help to get compensation. With the right approach, it is possible with a small investment to provide reliable protection against unforeseen expenses for the restoration of the car.