Gari Dombo, Managing Director, Alexander Forbes Insurance
Helping consumers understand how their insurance works is an important part of developing an insurance industry in South Africa that meets the needs of the market.
To this end Gari Dombo, Managing Director, Alexander Forbes Insurance says “it is important to educate consumers on how insurance products work so that insurance is used intelligently to mitigate risk, and is not just seen a grudge purchase.”
A question that puzzles many users of insurance is the degree to which insurance rates differ, especially when the things being insured are very similar, for example, vehicles of the same value.
“Notwithstanding that vehicle drivers could have very different profiles, and attract different rates, most people battle to understand why similarly priced vehicles attract such different fees” says Dombo.
If you think about it, however, different models in very similar price ranges offer a widely differing spectrum of risks. Parts prices could be different, or the frequency and severity of accidents could vary from vehicle to vehicle.
A simple example is windscreen prices. “A new entry level vehicle worth R80 000 could have a windscreen that costs R2000, while a six year old luxury vehicle, now also only worth R80 000, could have a windscreen that costs R6 000 to replace” explains Dombo.
While the smaller new car and the older luxury model might retail at the same value, clearly their repair costs are very different.
Also, the parts of different vehicles are positioned in different places. Some vehicles, for example, have expensive electronic components in the front. Since front end damage is most common, vehicles with expensive front end components have a greater frequency and cost of repair. So, even if one vehicle has cheaper parts overall, it could have a higher repair cost profile.
Furthermore, some vehicles are more prone to accidents than others. Even ignoring driver differences, like age, gender, how long the driver has been licensed and where the vehicle is driven etc., factors like design differences and performance (measured by engine size or power output, either horse-power or kilowatts) or a combination of these could result in a greater frequency of accidents. More dangerous combinations will attract higher rates.
That said “it is very difficult to pinpoint exactly which factors contributes to the higher probability of a vehicle being in an accident - though we are able to tell a client that one vehicle is a higher hijack risk or has a higher repair cost profile than another” says Dombo.
Insurers are, however, able to estimate that it will cost more to repair damages on one kind of vehicle compared with another. In the end all these variables are combined into individual premiums - set for each and every vehicle and driver combination.”
So while “on first reflection one would expect similarly designed cars or cars of similar value to attract similar rates, once the variety of combinations are factored in it becomes apparent that the risks, and hence the rates they attract, are indeed very different” concludes Dombo.
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