Earned Premium is a technical term used by Insurance Companies when they complete their accounting requirements. It can be defined as “the portion of a premium that is applicable to the cost of providing insurance during a specific accounting period.”
Insurance premiums, including car insurance premiums, are payable in advance. The term used most widely is monthly in advance although some policies require premiums to be paid a year in advance. An example of where insurers usually require annual premiums is a specialized policy available for the insurance of vintage or collectable cars.
The earned premium relates to the expired, consumed or used, part of the policy period. If the insurance companies have to do their accounting statistics on the 15th of a month, let’s say January, then all the premiums in their books received for the months of January cannot be included in their figures. They can only include the portion of the premiums covering the period from the 1st to the 15th of the month. The balance of the premiums for the rest of the month is referred to as unearned premiums.
Where a policy is terminated early, the insured will only be responsible for the earned premium portion up to the date of cancellation.
An emergency can be defined as a situation where peoples’ lives could be endangered or the situation, if left unattended, could lead to a bigger financial loss. When you take out Comprehensive Car Insurance cover emergency roadside assistance is usually included as part of the benefits. It is available 24 hours a day, 7 days a week. Check your policy to see if emergency assistance is included.
The assistance is usually only available within the borders of South Africa. An annual limit per car will apply and sometimes the number of incidents is also limited. This service is a great benefit, especially for women travelling on their own. Make sure that you always have the emergency assistance number stored on your cell phone. You will also receive a sticker with the towing details to display in your car.
The following incidents are covered under emergency roadside assistance—bear in mind that each incidence will have an applicable limit:
- Breakdown and towing to the nearest service provider—remember to use only authorized towing companies
- Storage
- Flat tyre, Flat battery, Keys locked in car
- Running out of fuel
- If away from home – hotel accommodation or alternative transport
- Car returned to you after repair
Accident, Medical and Home Emergency assistance can also be part of an overall emergency package.
An endorsement to a car insurance policy is an amendment that becomes part of the policy contract. It must be in writing and is accepted as a legal document that forms an integrated part of the insurance contract. The endorsement change or modify the original policy in one way or the other; it is therefore applicable to a policy that is already in use. The term rider is also used for an endorsement.
An endorsement can change the policy’s actual cover or the items covered as well as any of the terms or conditions. The insured can request the following amendments to be made to the policy: adding a new car; accepting a bigger voluntary excess; reducing or deleting an existing voluntary excess; change of address or personal details; increasing or decreasing the sum insured; change to security equipment for example installation of a tracking system; adding or deleting a nominated user; adding a spouse or child’s car; deleting a covered risk such as fire; adding sound equipment.
An endorsement may, as a consequence, change the premium payable; either an increase or a return premium. The change may also have no effect on the premium. The requested endorsement must be approved by the insurance company before they will affect the necessary endorsement.
Where an escalator clause is included in an insurance policy it gives the insurance company permission to increase the sum insured on the property. The escalation rate is based on the inflation rate and will remain in place throughout the term of the insurance policy.
The Insurance Companies have actuaries who are specialists in their field. (See actuaries in the glossary for a complete description.) One of the calculations the actuaries will make is called the Estimated Maximum Loss (E.M.L.) It is also known as the Maximum Probable Loss (M.P.L.)
The insurance company needs to know what their total exposure is in terms of all of the insured perils. An insurance company taking on car insurance needs to calculate the maximum probable loss in case of fire, theft, accident and any other peril they have provided cover for.
Insurance companies need these figures for a number of reasons:
- They need to calculate their capacity to protect their solvency margins. Capacity is basically the limit to the extent that insurance companies can expose themselves to possible losses. (See capacity in the glossary for further details.)
- They must take out re-insurance for the amount exceeding their capacity.
- The E.M.L. figures help in the calculation of risk profiles.
- The E.M.L. figures are also used when calculating individual car insurance premiums – the higher the value of your car, the higher the Estimated Maximum Loss will be and the higher your insurance premium will be.
In car insurance an event is the happening that gives rise to a claim against insurance. Examples are car accidents, theft, fire, storm or carjacking. Without a specific event there are no grounds for a claim. In car insurance your policy document and/or schedule will specify clearly which events you are covered against. These specified events are referred to as defined events. Any other event, that falls outside the defined events are called exclusions and are not covered by insurance.
One single event such as the attack on the World Trade Centre can have a major impact on the short term insurance industry as a whole.
In car insurance the defined events will depend on the type of cover you take out, for example if you buy only third party insurance, theft, accident or fire will not be covered events in your policy. If you take out comprehensive car insurance there will be a long list of defined events for which you are covered such as: Accident damage to your own car and the property of third parties, damage to other property as a result of the accident, fire damage or destruction, theft, carjacking, storm and hail damage. This is only an indication of defined events; check your own car insurance policy for full details of your cover.
An excess is the first part of each insurance claim that is not covered by the insurance company. It is generally used in all car insurance policies and the excess represents the amount of each claim that the insured party will be personally responsible for.
Excess amounts will be specified and agreed on before the insured accept the policy document. In car insurance we find different excess amounts for different events or risks covered. For example the excess on a claim for replacement of a window or windscreen glass will not be the same as that of replacing a car radio. The insurer will deduct the excess from the amount they pay out towards a claim. Excess is also referred to as the first amount payable and is a form of self-insurance.
Insurance companies use excess as an underwriting tool to discourage the number of small claims that are administratively expensive. It is also done to enforce a sense of duty and care on the insured party. The normal excess is also called a compulsory excess. The insured has an option to increase the amount of the excess payable and this is referred to as a voluntary excess. The effect of a voluntary excess is a reduction in the amount of the monthly premium payable.
Excess of Loss is a form of reinsurance where the first insurer, who has provided cover to an insured, takes out reinsurance from another insurer. It therefore provides cover for the first insurer’s possible loss in the case of claims.
The reinsurer will have an obligation if a specific claim, or a number of claims, exceeds a certain amount. His liability will be limited to the balance of losses exceeding the agreed amount as stated in the reinsurance policy. For example the excess of loss reinsurance policy may state the first insurer will pay for claims up to R500 000. If he receives claims of R750 000 the reinsurer will pay the balance of R250 000.
Reinsurance can be taken out for a specific policy where the insurance company has a huge exposure or for the sum total of a number of claims coming from a common, defined risk area. For example, if an insurance company finds that they are experiencing a large number of claims for hijacking incidents, they may decide to reinsure the risk of hijacking with a reinsurer.
Insurers also use excess of loss reinsurance where the liability under a particular policy may be difficult to calculate.
Exclusions could be a certain event, person, peril, condition or situation that is not covered by an insurance policy; in other words should that event take place no benefit will be payable. Usually car insurance policies have a number of exclusions or exceptions and it is important to read your insurance policy document and the schedule very carefully so that you know what is not covered.
A specific exclusion, or more than one exclusion, could be removed at the payment of an additional premium should the insurance company be in agreement to accept the additional risk. Typical exclusions from car insurance would be: overloading your car; using your car as a taxi service (earning income from it,) damage to your car from driving on gravel roads and many more.
The reasons why exclusions are necessary include the following:
- It could be an uninsurable risk such as war.
- It may be a form of specialized cover that the insurer is not interested in.
- To avoid duplication of insurance cover such as events covered by another type of insurance such as the Road Accident Fund.
- An illegal act, such as driving without a licence, or driving under the influence of alcohol or drugs will always be excluded from car insurance.
Ex Gratia literally means “an act of grace.” When an insurance company receives a claim from an insured person the first thing they will do is to confirm that the event which gave rise to the claim is indeed covered by the insurance policy. If, for example you took out third party only car insurance and your car is written off in an accident, you cannot claim your loss from the insurance company, they will only cover the damage to the third party’s car.
Should an insurance company decide to make a payment towards a claim that is not covered by the policy it is called an Ex Gratia payment. An Ex Gratia payment can either be for the full amount of the claim or, more likely, for part of the claim. The insurance company has no legal liability to make any payment in terms of the policy wording. When an insurance company decides to make an Ex Gratia payment it is done as a favour, the payment is made for “goodwill” purposes. Such payments are made without any admission of liability and without waiver of right by the insurance company.
Insurance is a business and any business needs to make a profit to stay in business. In the insurance field very careful calculations must be made as insurance companies are in the business of risk. When dealing with short term insurance the risk is not a certainty but a possibility, making it even more difficult to calculate properly. Car Insurance is particularly difficult to calculate as there are so many factors that need to be taken into account such as the type of car, the person applying for insurance and the many perils (risks) involved in the insurance of a moveable asset.
Insurance companies make use of actuaries who are specialists in their field and who have made a study of insurance risks. Actuaries make use of statistics on all possible risks and previous claims history. Like any other business insurers need to build the cost of running their business into the price of the product they sell. In the insurance business the price of the product will be the monthly insurance premiums payable by the insured clients.
Included in every premium will be the insurer’s calculated cost for the administration of the insurance policy. This part of the premium is called the expense loading.
When we use the word experience in short term insurance terms such as car insurance we are mainly referring to the record of losses an insurance company had to pay out over a specific time, usually a year. Experience can also refer to the loss record of a specific insured person or a specific class or group of insurance – examples are the experience with female drivers, male drivers or drivers in a certain age group. Insurance companies will also keep statistics classified by the type of risk or peril such as theft, carjacking, fire, storm damage and accident damage.
This experience forms a very important part of the statistics used by actuaries to calculate insurance premiums and is referred to as the experience rating. The experience rating has the major influence when it comes to the determination of individual car insurance premiums. As an insured person your own insurance experience record will also play a role in your insurance premium, the claims you had in a previous year will influence your premium for the new year. If you had no claims it will have a positive effect on your premium.
The system of no claims bonuses is based on the experience rating. A no claims bonus system helps with the advertising of car insurance. It also discourages drivers to make small claims; in turn, making insurance more affordable for everyone.
The date your insurance cover ends is called the expiry date. In insurance, because we are dealing with risk, the time of day is usually also included. If the expiry date of a policy is listed as 30 June 2008 at 24h00, you will no longer be covered from one second after midnight on that day.
In car insurance we do not normally have an expiry date until you, or the insurer give notice to terminate the policy.
Exposure in short term insurance such as car insurance refers to the insurance company being exposed to the possibility of loss. The immediate environment of the risk object, including events, circumstances, scenery, conditions, people, and objects can increase or decrease the exposure of the insurance company.
As an example an insurance company will look at their exposure in a certain area when taking on more new business in the same area. Let’s say a specific area is high-risk because of regular theft and carjacking incidents – before taking on more car insurance in that area the insurance company will look at their exposure and calculate if they can operate more business profitably within the area.
The insurance company will ask their actuaries to measure the extent of their exposure when taking on a new or unknown risk. The actuaries have different criteria they will use in order to calculate exposure as accurately as possible. When the insurance company refer to exposure the policy period is expressed in years. When an insurance company find that they are over-exposed in a certain area or specific risk product they will seek to find re-insurance for part of the risk. This will spread out the exposure amongst two or more insurers. (See re-insurance in this Glossary for further details.)
All insurance policies have exclusions and it is very important to familiarize yourself with the exclusions in your car insurance policy. Should the insurance company agree to provide you with insurance cover for anything listed as an exclusion in the original or basic policy, it will be done in the form of an endorsement which is added to your car insurance policy. The endorsement will confirm that you are provided with the additional coverage as listed. This is called extended coverage.
Extended coverage can also be included as a clause in the original policy when this is agreed on before the contract has been finalised.
There are many types of the risks that can be included as extended coverage, here are some examples:
- Windscreen extension—the excess may be waived in a windscreen extension
- Waiver of Subrogation rights
- Cover for riots and strike action
- Loss of keys extension—will cover the cost of replacing locks and keys, including the remote alarm controller
- Fire extinguishing charges extension
- Loss of use following theft
- Loss of use following accidental damage
- Extended non-owned coverage endorsement—where a car is given to a named individual for his regular use but he is not the owner.