Why do car insurance premiums usually increase in cost annually or if a motorist claims in South Africa? Let’s explore potential reasons. You have just been involved in a car accident, resulting in a large car insurance claim. Thereafter you discover that the premium was raised, and you ask yourself why?
Premiums must be based on the market value of vehicles
In 2013, National Treasury instructed the short-term car insurance industry to depreciate the value of vehicles according to the market value thereof. Prior to the change, the majority of short-term insurance companies had insured their clients’ vehicles based on the purchase price, which resulted in a higher premium. Claims were paid out according to the market value of the vehicle instead of the purchase price.1 Resulting in policyholders paying higher premiums, and receiving an amount for their claims based on the current market value of the vehicle. The car insurance companies as well as sales staff were benefitting from increase car insurance premiums. 1
Premiums were not coming down
Policyholders were complaining that they had not seen any reduction in their premiums, which should be the case if premiums were based on the current market values of their vehicles. Premiums increase due to various other factors also taken into consideration during the evaluation and calculation of premiums. 1
Some reasons for higher premiums
Possible reasons as to why premiums are higher:
- The continual rise in the cost of vehicle repair due to the economic climate; and,
- The strict requirements from insurance companies regarding the warranties of parts. Certain insurance companies can insist on specific brands and/or repair service providers to be used in order for the warranty to be valid.1
What is the retail value and market value of a car?
The market value of a car is influenced by several factors such as mileage, service history, the condition of the vehicle and the number of accidents it may have had.
How premiums are generally calculated?
Car insurance premiums are not calculated in a uniform manner across the car industry. The Dealers Guide is used by the motor industry to standardise the value of vehicles. The current retail value reflects the amount that a motorist would have to pay to replace his or her current vehicle. 3 From the above, it is obvious that the client has no say regarding the value the vehicle should be insured for as this is based on current retail value.
Premium calculations based on some factors
Several factors to be considered when calculating premiums: 1
- At annual renewal time, the insurer lowers the premium based on the current retail value of the car according to the Dealers Guide.
- The likelihood that the insurer has to pay out the current retail value of a car when it has to be replaced.
- The possibility a third party claim will have to be paid when the motorist is liable for damages caused to their property.
- The likelihood of the insurer having to repair a car due to an accident.
The economic climate of South Africa plays a significant part in the cost of imported car parts due to the high exchange rates.4 Furthermore, higher paint prices ,higher wages of panel beater staff and increase administration costs of the insurer also has an impact on the insurance premium calculations. Majority of the premium amount is made up of the cost of car accident repairs as well as possible liability claims. 1
Although car retail value of comprehensively insured motorists is lowered every year, the overall premium still increases due to the foregoing reasons.
The South African car industry could be destroyed
Ever-increasing premiums will mean that insured motorists will have to eventually stop paying insurance. This will lead them to buy cheaper, pre-owned vehicles instead because they can’t afford to insure new vehicles. The South African Insurance Association (SAIA) has warned that the car insurance industry obviously must take serious note of this impending shift in affordability for the average motorist. The greatest challenge facing the insurance industry is the serious, and continual rise in the cost of repairs. Choosing cheaper, alternative, quality car parts (but not ‘pirate’ parts) is one way to alleviate this pressure. 1
Prime South Africa’s car insurance premiums
A car insurance company such as Prime, however, provides affordable car cover for its policyholders, with premiums staying the same for the life of the policy. Learn more about car insurance.
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