Why insurance premiums increase even as vehicle values decrease

Gari Dombo, Managing Director, Alexander Forbes, Insurance

Most of the factors driving premiums up have little to do with a vehicle’s value since over 90% of motor vehicle claims are for accident, not total loss.So, regardless of whether the overall value of the vehicle is decreasing, the costs of repairingvehicle damageis constantly on the increase.

“Whenit comes to paying forrepairs a vehicle'svalue isirrelevant since the value ofa vehicle is onlya factorwhen total loss occurs” says Gari Dombo, Managing Director, Alexander Forbes Insurance.

Moreover, the size of a claim bears little relation to the value of the vehicle. In other wordsthe cost of replacing 30-40% of a vehicle is only very slightly drivenby the vehicle's value.Similarly,when you cause an accident, the costs associated with repairing a vehicle (or other property) belonging to a third party are notdeterminedby the value of your vehicle.

Furthermore, modern vehicles are more sophisticated in their construction, including computers and xenon lights, for example. “These generally cannot be repairedand have to be replaced at considerable cost” says Dombo.Add to this thefact that many replacement parts are imported at unfavourable exchange rates and "we go some way to explaining why repair costs continue to increase at 10 – 15% per year even as vehicle values decrease" says Dombo.

Also, sinceonly a tiny minority of claims are total write offs due to accident or theft,installing additional security on your vehicle to prevent theft will not necessarily result in a significant reduction in premium astheftis not the kind of loss that is driving premiums up.

Either way, ever since security standards were agreed between the South African Insurance and Motor Vehicle Manufacturers’ Associations, insurers expect a certain level of  security on vehicles. “If these standards are not met insurers would usually ask for additional security measures to be taken – without offering premium discounts” explains Dombo.

Since premiums increase to keep up with the ever-increasing costs of repairs, regardless of the value of the vehicle, Dombo advises consumers to; consider modifying their driving behaviour to reduce the likelihood of accidents, do an advanced driving course, or, when purchasing vehicles, choose reliable models that are cheaper to repair and have parts that are readily available.

When it comes to repair the availability of parts is particularly important, "since if parts are not readily available, car hire costs could be astronomical as you wait for your vehicle to be repaired” concludes Dombo.