We have already looked at pricing of short term insurance and in particular at that of car insurance. Please refer to the glossary entry named pricing. Rate is the term used to describe the cost of a unit of insurance that is used to calculate the insurance premium you will pay on your car insurance.
The rate is usually expressed as a rate percentage. The rate is also called the pricing factor. There are various rating factors used when calculating car insurance premiums. A rating basis refers to the value given to each rating factor but it could also mean a set of rating factors – the rating structure.
A rating agency is an independent company that will study the financial statements of an insurance company and then give an opinion of the financial strength of the insurance company to meet its obligations. Obligations, in this sense, refer to the ability to meet the claims from insured parties.
A rated policy is one where the insurance company may expect a higher-than-average potential of loss. A rated car insurance policy will carry a higher premium and also have special exclusions applied to it. An example – a person under twenty-five is seen as a higher risk and is asked an additional premium.
Please refer back to the glossary entries on Rating and Pricing as these entries contain further background information on Rating Principles. We have learnt that rating is the term used when calculating an insurance premium on short term insurance, for example car insurance.
Rating is also known by the name of ratemaking. We have also learnt that an insurance rate is the basic price asked on any given unit of exposure. As an example, in car insurance different rates will be calculated for the risks of fire, theft, accidental damage and third party claims. Depending on what type of car insurance you choose, each rating for the number of exposure units will be added together to arrive at the car insurance premium you will be asked to pay.
The principles an insurance company use in rating include the following:
- Being reasonable: to ensure that the average insured person can afford the premiums.
- Adequate reserves: The insurance company must maintain adequate reserves to ensure that it remains a profitable organization.
- Simplicity: The system used must be inexpensive and workable so that both employees of the insurance company and the insured persons can understand the system.
Stability: The pricing structure should remain stable. If there are huge upward movements of insurance price it will cause a public uproar and damage the image of the insurance industry as a whole.
Once a car insurance company has processed a claim there are a number of possible outcomes – the insurance company can accept the claim and pay out a settlement amount in the case of a total loss, or it can decide to repair the car in case of accidental or other damage. The company can also decide not to pay out a claim and must advise the insured party in writing of this decision as well as the reason why it is not going to meet the claim. The claim in then declared closed.
A re-opened claim is a claim that has previously been closed, but for some or other valid reason needs to be re-opened. There may be a number of reasons why a car insurance company needs to re-open a claim it has previously closed:
- New facts may come to light that will have a direct bearing on the decision of the insurance company and it needs to review the new information and make a new decision.
- The insured person may disagree with the decision made by the insurance company and decide to take the case further: the insured can either institute formal legal action against the insurance company or
- The insured can approach the office of the Short Term Insurance Ombudsman to act as a mediator to try and resolve the case.
Decisions by both the Ombudsman and the Court will be binding on the parties concerned.
Any person wanting to take out car insurance should first obtain a number of insurance quotations to compare before making a final decision on which quote to accept. A car insurance quote is a reasonable estimation of the monthly premium cost of a car insurance policy based on the information supplied by the insurance applicant to the insurance company.
To obtain an accurate quotation for car insurance the applicant must provide the following information: age, gender, details of the car including age, value, security fittings such as a tracking device, address where the car will be kept at night and whether it is housed in a locked garage over night. Without this minimum information the insurance company will not be able to provide a reasonable estimation of the monthly premiums. Please note that a provisional quote is just that; before accepting insurance the applicant must confirm the final figures.
Insurance premiums can vary from company to company and it is in the best interest of applicants to obtain at least three quotes. The easiest way to obtain quotes AND arrange your car insurance is online through the various insurance sites available. There are also online insurers that will obtain a number of quotes from different companies while you only need to provide your details once. These are called insurance aggregate sites.
The validity of a car insurance contract is measured against certain legal terms – two of the most important being urberrima fides (in good faith) and the reasonable man test. The reasonable man test is now widely accepted as the true test of validity in insurance business. The reasonable man test states that it can be demanded of a person looking for car insurance (the proposer) to provide the insurance company with all the applicable information that any reasonable man would see as being important information (material facts) with reference to the item of insurance.
The test here is that, should a case go the court, would a reasonable man have thought that the information under question would be of material value to the risk? Saying that you did not think the information was important will not be an acceptable defence. Finding a clear definition of a reasonable man is no easy task but the opinion of someone with some tertiary education and an average intelligence has been accepted as a fair definition. You therefore do not need to have expert car insurance knowledge to pass the reasonable man test. An example will be that a reasonable man will declare to the insurance company that he often drives in high risk areas because of the nature of his work; this could have a direct influence on his car insurance premium.
The word recovery could have different meanings in car insurance.
Roadside Recovery: This service refers to recovery of a car after a mechanical breakdown or an accident. Roadside recovery is usually included in comprehensive car insurance and only an approved towing operator should be allowed to tow your car. See car towing insurance in this glossary for further details.
Recovery can also be the amount of money recovered from a third party, or his insurance company, if he was responsible for the loss or accident. Your insurance company will pay out your claim but then try to recover the money on your behalf. As the insurer has already refunded you they are entitled to the recovery but they will refund the excess to you if they were able to recover that as well.
Where an insurer has a reinsurance agreement with a reinsurance company they will also recover a portion of your car insurance claim from the reinsurer, depending on the type of reinsurance treaty in existence.
In the case of a write-off or total loss, once the insurance company has settled your claim, any recovery or amount received from the sale of the salvage will belong to the insurance company. See the glossary entry on salvage for further details.
Reimbursement in a car insurance claim will be the payment of an amount of money to the insured person to make good the loss or damage suffered to the insured object, namely the car. When a car was damaged in an accident the insurance company has to decide if it will repair the car or write it off as a total loss. The decision to write off is taken where the cost of repair exceeds the insured value of the car. The insured is reimbursed from the insurance pool to which all car insurance clients have contributed.
Reinstatement will take place should the insurance company decide to repair, reinstate, or make good the damaged car. The choice always lies with the insurance company as to whether the car will be written off and the insured reimbursed or whether the car will be reinstated. The insured party cannot demand either of the two options specifically.
Reinstatement of the sum insured or reinstatement of cover after a loss will be applicable where claims have depleted the limit of insurance agreed on in the contract. If the insurance company is prepared to reinstate the sum insured the insured party will be asked to pay an additional or reinstatement premium.
The word reinstatement means to bring something back into use or force after it has been out of use. Reinstatement is used in a number of different scenarios in insurance.
Reinstatement of the sum insured: In this case we refer to the reinstatement or restoration of the sum insured after a loss or damage has reduced the value of the insured item.
Reinstatement option of claims settlement: This refers to the sole right of the insurer to restore or replace the lost or damaged property rather than making a financial payment to the insured. This is according to a special provision in the insurance contract. The insured can never insist on a financial payment instead of the repair of the damaged item, such as a car damaged in an accident. Where the insurer uses the reinstatement option it means that, in effect, he has agreed to a new contract.
Reinstatement value conditions: This is also known as the replacement cost. “New for old” cover is normally used in household insurance instead of the market value (as is normally the case in car insurance.)
Reinstatement of a cancelled policy: Should a cancelled policy be repaired to its full force after cancellation, the term reinstatement is also used. It could have been cancelled due to the insured not making the agreed insurance premiums on the due date. Companies may require evidence of insurability and signing of a no-loss declaration as well as payment of a re-instatement fee before agreeing to reinstate the policy.
An individual insurance company is usually not financially able to carry one huge risk on its own. As examples, think of the Boeing Aircraft Corporation in America, or here in South Africa, a firm like Anglo American. Reinsurance is a method used by insurance companies to spread the risk amongst insurers and thereby protect themselves against one huge loss that could cripple the company financially.
An insurer can enter into a reinsurance contract with another insurer in two ways: it can take place on a case-by-case negotiation or the insurance companies can come to an agreement before the contract is written. Proportional reinsurance refers to cases where
Reinsurers take a given proportion of the direct insurer’s premiums and losses. Basically reinsurance is an insurer taking out insurance.
The term direct insurer describes the company that originally enters into the insurance contract with the insured party. The re-insurer is a company who accepts reinsurance contracts and is also referred to as the reinsuring company. The direct company who now receives the reinsurance cover is called the ceding company and will refer to the reinsurance cover as reinsurance ceded. The direct insurer can also become a reinsurer by accepting risk from other insurance companies.
Insurance companies that only deal in reinsurance business are called professional reinsurers. These companies do not write any direct business themselves. The reinsurance premium is paid by the ceding company to the reinsurer for the risk the reinsurer is accepting. Reinsurance limits the exposure of a company to risk and also combines the expertise of the insurers. It increases the overall capacity to accept risk.
Renewal is the continuation or extension of insurance cover after the policy has expired. If you took out a car insurance policy for a year starting from the 1st January, your insurance cover will end at midnight on the 31st of December. Your renewal date will be the date on which the existing policy matures, in our example the 31st of December.
Renewal will take place once the insurer has accepted the premium for a new policy term. A renewal policy will be issued by the insurance company to the insured as proof of the continuation of cover. It will stipulate any changes in the premium amount and other conditions, should there be any. The premium will not automatically change, it depends on the insured item, its current market value and the insurer’s own position in terms of insurance premium increases (which is normally linked to the inflation rate and the recent financial performance of the company.)
A renewal notice is send out by the short term insurer to the insured to remind him that the contract will terminate soon and he needs to take the necessary steps should he wish to continue with the cover for another period of insurance.
Replacement refers to the substitution of one item with another similar item, without any deduction for depreciation being made. Replacement in insurance terms also means replacing old with new. In short term insurance the term replacement cost refers to the value of a piece of property as determined by the current or existing price of the same article – at today’s prices.
In car insurance most insurance companies will insure your car at the current market value and not its replacement value. The market value represents what you could get for your car if you sell it in an open market. The value or cars decrease rapidly and insuring your car at replacement cost will be very expensive.
There are some instances where cars will be insured at replacement value. This is usually the case when you insure a brand new car – should the car be damaged beyond repair and stolen within the first twelve months of cover the insurance company will replace your car with a new one. If the car has been damaged, insurance companies will look at a percentage damage of approximately 60% or more of the insured amount when deciding about replacement or repair. There will also be a limit on the number of kilometers travelled to qualify for replacement, usually 30 000 kilometers.
Replacement Parts: When your car was damaged in an accident the insurance company will be responsible for the repair to the car. Many insurance companies will insist that you use an approved repairer as they need to insure that the car is properly repaired and only original replacement parts are used. See approved repairer in this glossary for more details.
Replacement Items: If your car was written off in an accident, or not recovered after theft or hijacking, you will be paid out for a total loss. If you buy another car to replace your previous car you need to advise the insurance company of all the details of the new or replacement car. The car will not be automatically insured as the insurance company will not know the details of the car.
Basically, it will be treated as a new car insurance contract and the premium will depend on the make, model, age and value of the car. Because of the loss and subsequent settlement you would have lost your no-claim bonus and will be asked to pay a higher premium on the replacement car.
If your car was new and less than twelve months old with less than 30 000 kilometers on the clock, your car will be replaced with a new one. If it is a second-hand car you will be paid out the current market value. In each case you will still be responsible for the excess and other costs involved in having to replace the car.
Reporting of a car insurance claim is never an enjoyable happening. Whether you have been involved in an accident, or your car has been stolen or you were the victim of a carjacking incident – it will be accompanied by stress or even trauma. You can make your life easier at this difficult time by ensuring that you are as prepared as one can possibly be for the unknown.
In car insurance it is important to ensure that you have the details of your insurance company at hand whilst driving. Also make sure that you display the details of your insurance company’s towing instructions on the sticker provider by your car insurer.
Each insurance company will have time limits on how long you have to report a claim after the incident such as the theft or accident. There will also be a time limit for having reported the incident to the police. Not all car insurers have the same limits and it is very important to make sure you know the details stipulated in your policy document. If you exceed the time limit not even the Ombudsman will be able to help you. Also report the claim in the manner required by the insurer; usually a prescribed form needs to be completed.
When a car insurance claim, made under a valid policy, is rejected by a car insurance company the term used is repudiation. In terms of South African legislation, which governs the way insurance companies operate, the insurer must advise the insured party in writing of its decision to repudiate the claim. The insurance company must also advise the reason for its decision not be pay out against the claim. There are three main reasons why a car insurance claim can be repudiated:
A condition or term of the policy not complied with by the insured person: There are many conditions and terms applicable to a car insurance policy and if the insured party is found to be in breach of any condition the insurance company has the right to repudiate the claim. An example will be where the insured did not report a claim within the laid down time limit.
A material fact was withheld from the insurer: Any fact that could have had an influence on the insurer’s decision to insure or not insure the car must be declared by the insured person, for example, if a car had prior accident damage. Not doing so provides sufficient ground for the insurance company to repudiate the claim.
A fraudulent claim: In this case the insurance company must be able to prove that fraud has taken place; suspicion alone is not sufficient grounds for repudiation.
Reserves are money set aside (reserved or held back) to meet future obligations at their due dates. Reserves are also called provisions. Insurance companies in South Africa are highly regulated by law. The short-term insurance act stipulates the reserves that have to be maintained by insurance companies to meet expected future claims. The reason for insisting on maintaining reserves is to protect the policy holders of the company.
As there will always be a delay between the actual occurrence giving rise to an insurance claim—such as a car accident—and the actual settlement of the claim, money need to be placed in reserve to meet the obligations of the insurance company.
There are different types of reserves that need to be maintained by the insurance company, the main one being the loss reserve as discussed above. Under this category there are different sub-categories: reported and adjusted losses; reported and not yet adjusted, incurred but not reported and future claim handling and settlement.
Another reserve applicable to insurance is the unearned premium reserve. This is basically premiums paid in advance that cannot be included in the financial statements of the company before they are due and are therefore placed in a reserve fund.
When dealing with car insurance there are different terms that can be used to determine the value of your car. The value of your car has an impact on the monthly insurance premium and determines what you will receive in the case of a total loss. It is therefore very important to make sure that your car is insured for the correct value.While most car insurance companies use market value to determine insurance premiums, some companies may also use retail value. The retail value is higher than the market value.
The difference between the retail and market values can be described as follows: Market Value is the price at which a car can be sold privately (out of hand) at any particular time. The Retail Value is the price one would pay for the same car if you were buying it through a car dealer.
The value of a brand new car depreciates very fast, some up to 40% in the first year; insurance companies therefore do not insure cars at replacement value (new for old.) In the instances where you are able to insure your car at retail value, instead of market value, you will pay a higher premium. Some specialist insurance products such as off-road (4×4), vintage or collectable car insurance use retail value to determine premiums.
A rider in car insurance terms is another word used to describe an endorsement to a car insurance policy. An endorsement is a change to one of more of the terms of the policy. Please see endorsement in this glossary for a full description.
If a motorcycle is insured the term rider will also mean the person operating the insured motorcycle.
The term “risk” is fundamental to insurance. From an insurance point of view risk is the uncertainty of financial loss. Risk is that which you insure against, i.e. theft or fire; it’s a situation that cannot be controlled or perfectly foreseen. It is also called the hazard exposure, or the chance of loss. The word peril is also used to describe a risk. To be more detailed a peril refers to the cause of a loss, such as a fire or explosion, while a hazard is the condition that may increase the chance or the severity of a loss. Faulty wiring is a fire hazard.In an insurance policy the word risk can describe the subject matter and it is also used to refer to the insured person sometimes.
In insurance the risk is transferred from the insured to the insurer who accepts responsibility to carry the risk in exchange for the payment of a premium. In short term insurance, such as car insurance, risk always has to do with an uncertainty, for example a car accident or theft.
Insurance companies also refer to the degree of risk – the ranking of risk by the possibility of it happening and the severity of the risk. Risk profiles, drawn up by actuaries, are used to determine the degree of risk. As an example female drivers have been found to be a lesser risk than male drivers. This will influence the actual insurance premium paid by females.
Insurance Companies have to run their businesses profitably and therefore they do not accept all risks but only those they can operate profitably. “Risk classification is the process by which insurers estimate the expected claim cost for different buyers and charge premiums that vary according to expected claim cost.” – Harrington and Niehaus definition 1999.
Risk can be classified in various ways. When dealing with a speculative risk there is a possibility of a loss, but there could also be a gain. In the case of Pure risk a loss or no loss is possible, there is no possibility of any gain. We also have fundamental risks – these will affect a large section of the population, even the whole world, such as war or an economic recession. Particular risks are restricted events such as car accidents and could be prevented by individual behaviour.
Pure risk is further classified as personal, property and liability risks. These are the risks we will find in short term insurance such as car insurance. Examples of personal risks include injury or death; property risk could be a house or car and liability risks result from the actions or failure to act of a person.
Risk Management is the scientific approach of identifying and evaluating all the possible risks an individual or business entity may face and then to select systems and methods to either prevent or minimise the effect of the risks. It also includes the transfer of risks one is not prepared to carry for your own account to an insurance company who is prepared to take on the risk. Risk management is therefore a plan to minimise and deal with losses.
The aim of risk management is to calculate the likelihood of a loss taking place and the extent of the possible loss as well as the financial implications thereof. Every individual has the responsibility of risk management, for example if you own a car, part of your risk management will be to take car insurance.
Personal risk management will also include the steps you take to safeguard your car, such as always making sure your car is locked, never leaving valuable items in the car, installing safety devices such as an alarm, immobilizer or tracking device, keeping your car in a locked up garage overnight, always parking in safe places and driving responsibly to prevent accidents.
A Risk Manager is an individual who carries out the process of risk management. His role includes identifying potential risks, measuring the financial impact and implementing controls to eliminate and/or reduce the impact of the loss.
There are various tools used in risk management:
Risk Avoidance: to avoid a risk completely – an extreme example will be to own a car but never drive it to avoid the risk of being involved in an accident.
Risk Reduction: or loss prevention will include all measures taken to reduce the possibility and/or the severity of the risk. As an example installing a tracking system will reduce the risk of your car being stolen. Driving responsibly will reduce the risk of being involved in an accident.
Risk Transfer: Taking out insurance will be transferring the risk which a person or business is not prepared to carry by themselves. It is the process whereby a party exposed to a possible loss, damage or liability, such as a car owner, transfers these risks to another party, namely the insurer or insurance company. As the insurer now carries the risk he can transfer the risk, or part thereof to a reinsurer.
Businesses will use Risk Monitoring systems to obtain feedback on any losses, analyse the losses and its extent and also to review the effectiveness of the risk management processes. The term Risk Financing is used to describe the steps taken to ensure that sufficient funds are available to deal with a loss.
Insurance actuaries are used by Insurance Companies to draw up risk profiles for their prospective customers, placing them into specific categories. In car insurance categories will be based on various factors, such as gender, age, profession or the type of car. Vintage or collectable cars will not fall into the same category as private cars.
Insurance companies utilise a number of sources to accurately establish the risk profile such as: proposals; quotations; surveys; market intelligence; competitor information; worldwide trends; reports from the news media and their own statistics on past claims, amounts and the claims behaviour.
The insurance company will ask many questions to establish an accurate risk profile for a car insurance client. Some questions are material to the risk (such as the car itself) and others affect the rating structure (such as age and gender.) The following information will be required for car insurance: age; gender; marital status; employment record; residential address; details of the car including the make, model and value; past claims record, other drivers, private or business use and details of risk protectors such as alarms.
All this information is used to draw up the risk profile that will determine the insurance premium. Risk profiles can indicate low, medium and high risk. An insurer may even decide that the risk is too high and refuse to offer insurance.
The Road Accident Fund Amendment Act came into effect on the 1 August 2008. In South Africa third party claims are made to the Road Accident Fund (RAF). A third party claim can be made by a person or his dependants who sustained injuries or died as a direct result of a car accident caused by a negligent driver. The RAF takes over the responsibility of the negligent driver.
A claimant will not have the right to sue the guilty party, which is a removal of a common law right. This is an emotional issue that will probably still be tested in court. The removal will restrict the victim’s claim to full compensation and the only option is to ensure you have sufficient income protection, medical aid and disability cover. (should you earn more than the limit of R160 000 per year.)
The new act removed certain inequalities to ensure that all road users are able to claim for loss of income and medical treatment. To ensure the sustainability of the RAF caps were introduced for loss of earnings, support and general damages. Claims are limited to a maximum of R160 000 per year for income loss or loss of support where previously no limits applied.
General Damages will compensate for pain and suffering, disfigurement, loss of pleasures of life, life expectancy and emotional shock. The RAF’s obligation for general damages is limited to serious injuries as determined by certain laid-down rules. Passengers in the car of the guilty driver were limited to R25,000 previously, but this limitation has now been removed.
No claims for any property damage can be made.
By law, any car on South African roads must be roadworthy. Before a car can be sold, a roadworthy certificate must be obtained from an official private or public testing station. Without an official roadworthy certificate you cannot register a car in your name. Checking tyre pressure, oil and water does not mean your car is roadworthy!
During a roadworthiness test the following will be checked: your car’s documentation and identification, brakes, suspension, steering, engine, exhaust, transmission, electrical system, fittings, dimensions and safety equipment. Safety equipment includes mirrors and safety belts.
Should you take your car for a roadworthy test remember to take all your documents, including the registration certificate with you. A fee is payable for the testing and issue of a certificate. Details of testing sites and a copy of the official roadworthy test sheet are available on the internet.
Before undertaking any long journey, always inspect your car. Check that brakes and lights are working properly, also check tyres, brake fluid and your windscreen wipers. We all have a responsibility to improve the safety on South African roads.
A very important point to note is that roadworthiness is listed in car insurance policies as a condition to paying out claims. If the insurance company can prove that your car was not roadworthy at the time of an accident your claim will be refused.