PREMIUM VERSUS VEHICLE VALUE: WHY DEPRECIATION DOESN’T RESULT IN LOWER INSURANCE PREMIUM COST
Thursday, May 17, 2012
You have probably wondered how it is that your vehicle, which depreciates in value over time, continues to be insured at the same, or even a higher, premium. This is a common gripe for short-term insurance policyholders but one that can be easily explained.
According to Thomas Creamer, Telesure MD: “Many people assume that the biggest risk to their vehicle is theft or a complete write-off in an accident and that the actual value of their vehicle is the major determinant of the insurance premium price. This is not the case. A relatively low percentage of accident-damaged vehicles are actually written off and in fact, an estimated 90% of vehicles involved in accidents are repaired and put back on the road. ”
Creamer says that the costs associated with repairing and replacing vehicle parts play a far more significant role in determining premium price and that in fact, most of the insurance premium goes towards covering the vehicle against accident damage.
He also points out that nowadays, rectifying damage to modern vehicles can be a very costly affair and that the cost of repairing a vehicle this year will be substantially more than the same time last year, even though that vehicle may have depreciated by as much as 10-15%.
“While in the old days, all that may have been required was a bit of panel beating, the case today is rather different. Electronic items like airbags can drive the cost up significantly. On some models, the cost of the windscreens is prohibitive, integrated headlight clusters look great but cost a fortune, and even bumpers can have a significant replacement cost, as today they often have sensors in them for park-distance control. Therefore, what may look like minor damage to the untrained eye can, and often does, cost tens of thousands of Rands to repair.
“What’s more, many of the vehicles on our roads are imported meaning that spare replacement parts have to be imported too. The costs of these spare parts have increased due to the escalating costs of petrol and transport, for example,” Creamer says.
Creamer explains the market value of your car may be lower, but because the premium is providing cover against damage more than anything else, it has to stay similar or increase to enable the insurance company to viably cover the risk.
“Dial Direct Insurance updates its customer’s vehicle value, automatically, on a monthly basis. At premium review stage, our customers receive the full benefit of the depreciation in value of his or her vehicle in terms of his or her premium calculation. Were it not for this adjustment in the value, the increase a client receives would be higher,” concludes Creamer.