The Value of Your Car
Let’s face it, buying a brand new car is exciting! The smell of new leather, the power of the engine...Sorry, but I have to burst your bubble. Most of us have learned the unfortunate truth that the value of a brand new car falls by at least ten to twenty percent when you drive it off the showroom floor. O well, you did not buy the car as an investment, but for the joy, convenience and comfort that is brings. Yet, there are certain implications that you need to take note of.

Some cars lose their value faster than others
The first implication of cars losing their value so fast is that you should take this into account when buying a new car. It might even influence you to rather buy a car that retains its value better. Some new makes and models were imported a few years ago and they became very popular as the price was affordable and interest rates were low at the time. Some of those makes have now stopped production resulting in a huge decrease in value, while getting spare parts is becoming a nightmare. So, don’t let your heart rule your head when buying a new car.

The implications on insurance
So, what happens to my insurance if the value of my car decrease? When you buy a brand new car it will be insured for the book value of the car. With a second-hand car you will insure it for either the market value or retail value. After one year the depreciation on a car usually slows down to 10 % a year, again depending on the make and model. We can argue that our car insurance should decrease every year in relation to the depreciation, but does that happen?

What does the Ombudsman say?
In November 2008 we saw a very interesting ruling handed down by Charles Pillai, the Financial Advisory and Intermediary Services (FAIS) Ombudsman. An insured person complained about his car insurance continuously going up while the value of his car is decreasing - the ombudsman ruled in favour of the client. One of the regulations of the FAIS Act is that the Insurance Company or its representative (insurance broker or agent) has the duty to inform their clients of all the conditions and rulings of the insurance product they take out. In this case the ombudsman ruled that the broker and the insurance company had to refund the client with the amount of insurance he paid for unnecessarily. We will have to see if the Insurance Companies respond with automatically changing insurance values of cars on an annual basis.

Why doesn’t the insurance company automatically reduce the value of my car on a yearly basis?
If you think about the above question it would probably be a near impossible task for insurance companies to simply adjust the insured values of all cars insured by them. Why? Simply because not all cars depreciate at the same rate each year. We already know that certain cars lose their value faster than others, but it is not only that.

Your car’s depreciation will depend on other factors such as mileage, how well you have looked after it and whether it has been involved in a serious accident before. So, the best solution would be that we all should take responsibility ourselves to establish the true value of our cars each year and then to ask the insurance company to adjust the insurance value accordingly. The most accurate valuation will be to ask a reputable car dealer what the value of your car is at present.

Other factors influencing insurance premiums
We also need to remember that insurance premiums are influenced by many other factors such as the inflation rate, which has increased considerably during 2007 and 2008. The price of spare parts, especially imported ones has pushed the repair costs of cars up considerably.

The accident, theft and carjacking rate in South Africa impacts heavily on the price we all pay for car insurance. Your own personal position such as your gender, age, where you live, how much you use your car and where it is parked also influences your car insurance premiums.

Conclusion
The best advice we can give you is to confirm the value of your car yearly and advise the insurance company to adjust your amount insured accordingly. One other thing to remember is the outstanding balance on your car loan, if you have one, and how it will be impacted by the decreasing value of your car. To learn more about that you can read our article on Gap Insurance.