- The insurance industry is opaque and extremely complex in ways that make it difficult for ordinary people to understand how much value is offered by any given policy.
- The insurance market is also very competitive, which means insurers are under pressure to compete on price.
- Consumers need to actively and continually compare prices in order get the best value over time. The good news is that this has become pretty easy to do.
How can you tell if an insurance policy offers value for money? Insurance isn’t something anyone wants to buy, so it’s not like we can weigh up the different features of competing policies and decide which we enjoy most. An insurance policy is an investment in peace of mind, and how on earth do you price that?
Insurance companies, for whom pricing risk is the essence of their business, have actuaries and data scientists constantly working to refine models and calculate how to structure the most profitable policies.
We lack the expertise and data, never mind the time, to compare insurance portfolios with anything like that kind of detail.
For most of us, insurance just is a necessity. The good news is that there are steps consumers can take to make the market work for us. But first we have to understand why policies are structured as they are.
Paying more for less
Car insurance is a good case study in pricing.
Suppose you buy a new car and want to get it insured. You call an insurer or contact your broker and you go through a detailed quote process. What make and model is the car? Is it new or used? Where do you park it? And so on.
That’s partly so the insurance company can calculate its own risk. If there’s a high chance of theft in your neighbourhood the insurer may want to charge a steeper premium. But it also ensures you pay a premium that accurately reflects the value of your car.
But unlike other insurable items, a car does not retain or increase its value. Cars are depreciating assets that rapidly lose value over time.
Consequently, even though your car insurance premium stays the same, the value of the insured vehicle decreases month-on-month. That means you are effectively paying more for insurance each month, considering the price of the premium in relation to the insured item.
Static pricing on car insurance means you’re effectively paying an increasingly inflated price each month.
Your insurer may offer an annual price review, but pricing is entirely at their discretion. And to make matters worse over the last few years they have been aggressively hiking your monthly premiums not decreasing them. If you have been with the same car insurance company for the past 4 years, your car insurance premiums have likely increased by a whopping 40%, according to Wesbank. That means if you were paying R1,200 a month for car insurance in 2013, that has gone up to around R1,680 now.
Extracting value from the market
Insurance market asymmetry seems loaded against consumers. First, insurance is a necessity not a luxury; we don’t have the option of opting out. Second, insurance companies decide how to price their products, regardless of the true underlying value of the insured item.
However, the South African insurance industry is also extremely competitive, with a number of large firms and niche providers competing for the same pool of potential policyholders.
Those aggressive radio adverts and spam SMSs, the morbid billboards for funeral insurance, these are actually a sign that insurance companies really need your business.
That’s good news for consumers, particularly in the internet age, where you can get an insurance quote at the click of a button.
However, it’s a mistake to compare quotes once-off and remain complacent. That’s because what seems like a good deal now may not offer the same value in six months or six years down the line. With so many top insurers competing for your business, we should all continually seek out the best value offers.
There is an important caveat: be sure always to compare apples with apples. For example, a slightly lower premium with a considerably higher excess may not offer value. Or a policy may sound attractive but have onerous exclusions. It’s essential to compare relevantly similar policies.
And of course, you should only ever take an insurance policy from a registered insurer with a proven track record. Cheap insurance is worth nothing if your insurance company won’t pay out.
As long as you keep those points in mind, you’re in the position to find better ongoing value from your insurance providers.
This month’s insurance spotlight is on King Price budget car insurance. King Price offers cheap car insurance that automatically gets cheaper every month to ensure you get real value car cover. Enter your details below and a consultant will call to offer you a free quote. There’s no obligation, but you could instantly slash your monthly car insurance premium.