What is an excess and why is it paid?

An excess, also known as a deductible in some regions, is the initial portion of an insurance claim that you, as the policyholder, are responsible for paying. It is the first amount payable by you when your claim is settled or paid out by your insurer.

Understanding the Insurance Excess

An excess is a standard feature across various types of insurance policies, including car, home, travel, and health insurance. When an insured event occurs and you make a claim, your insurer will assess the damages or loss. Before the insurance company pays out the remainder of the approved claim amount, you are required to pay the agreed-upon excess.

How Excess Works in Practice:

• Claim Scenario: Imagine your car sustains R10,000 worth of damage in an accident, and your policy has an excess of R2,000.
• Your Responsibility: You would pay the first R2,000 of the repair costs directly (either to the repairer or to the insurer, depending on the process).
• Insurer's Responsibility: Your insurance company would then cover the remaining R8,000 of the claim, up to your policy's limits.

Why an Excess is Paid: Key Reasons and Benefits

The payment of an excess serves several crucial purposes for both the policyholder and the insurance company, contributing to a more efficient and stable insurance system.

1. Promoting Responsibility and Care

A primary reason for the excess is to motivate policyholders to be more responsible and to take better care of their valuables. By having a financial stake in every claim, individuals are encouraged to be more cautious, prevent losses, and mitigate potential damage. This shared responsibility helps reduce the frequency and severity of incidents.

2. Deterring Small, Petty Claims

The excess helps prevent small, trivial claims that would otherwise be costly and time-consuming for insurance companies to process. Without an excess, policyholders might submit claims for minor damages or losses that they would typically absorb themselves. This mechanism ensures that insurance is primarily used for significant events, keeping administrative costs down.

3. Reducing Insurance Premiums

By agreeing to cover a portion of the claim yourself through an excess, you effectively reduce the financial risk to the insurance company. This reduction in the insurer's potential payout liability often translates into lower monthly or annual premiums for you. Choosing a higher excess can significantly lower your premium, making insurance more accessible and affordable.

4. Mitigating Moral Hazard and Fraud

The excess acts as a disincentive against fraudulent claims or exaggerated repair costs. If policyholders have to pay a portion of the claim themselves, they are less likely to fabricate claims or inflate damages, as they still bear a financial burden. This helps maintain the integrity of the insurance system.

5. Risk Sharing

Ultimately, an excess represents a fundamental principle of insurance: risk sharing. It establishes a partnership between the insurer and the insured, where both parties bear some financial responsibility in the event of a loss. This balance ensures that insurance remains sustainable and beneficial for all involved.

Types of Excess

In many policies, you might encounter different types of excess:

• Compulsory Excess: A fixed amount set by the insurer that you cannot change. This amount is non-negotiable and applies to all claims.
• Voluntary Excess: An additional amount you choose to pay on top of the compulsory excess. Opting for a higher voluntary excess can lead to a reduction in your insurance premium.
• Specific Excess: An excess that applies only to certain types of claims or specific policy sections (e.g., an additional excess for theft or claims involving young drivers).

Important Considerations Regarding Excess

When choosing an insurance policy, it's vital to consider the excess amount carefully:

• Affordability: Select an excess amount you can comfortably afford to pay out-of-pocket if you need to make a claim.
• Premium vs. Excess Trade-off: Understand the relationship between your excess and your premium. A higher excess typically means lower premiums, but a larger initial expense during a claim.
• Claim Frequency: If you anticipate potentially making frequent small claims, a lower excess might be more practical, even if it results in higher premiums.

Understanding your excess is crucial for managing your insurance costs and ensuring you are adequately prepared in the event of a claim.

For more detailed information on how insurance policies work, you can explore resources like MoneyHelper's guide on car insurance excess or general insurance information from financial literacy sites.