Car insurance:  Heads they win, tails you lose

How should I select an insurance company for my car, and what level of cover do you recommend?  Penelope

There are about five dozen (!) insurance companies registered with Kenya’s Insurance Regulatory Authority, and most are members of the Association of Kenya Insurers.  About a dozen of these have well established provenance and good repute. The rest…vary.

There are three common levels of motor cover.

Act Insurance: This is compulsory, doesn’t cost much and will never pay you anything. It protects everyone else from any damage you might do to them. By the same token, you in turn are protected by the insurance of any other motorist who does damage to you.  It is only in this context that the party making a claim must prove that the other party was at fault. 

 Third Party: This is Act Insurance usually with an additional cover for your own vehicle against “fire and theft”. No more than that. The premium is still relatively modest, but it does not include damage to your own vehicle in the event of an accident. A burnt or stolen vehicle’s nominal value in the event of a claim will be decided by the insurance company. If you want to be completely sure, you might be able to get an “agreed value” insurance, for a surcharge.

Comprehensive: This upgrades Third Party to include cover for your vehicle and yourself in the event of an accident, no matter whether it is your fault or someone else’s.  The premium will usually be about seven percent of the vehicle value you declare. Over time this can be reduced by an annually earned No Claim Discount (which can be forfeit if a claim is made). Double check that your comprehensive cover does include injury to the policyholder (or take Personal Accident insurance as well).  

Whatever insurer and cover you choose to make you legally compliant and reduce (not remove) your risk, be aware the insurance business model has reams of small print, one-sided principles, conditions and exclusion clauses, far too long and complex for most policyholders to fully digest.

The result can be summed up in a quick read of this single phrase: “They Win, You Lose.” Whatever the circumstances. That’s what makes insurance companies one of the biggest piggy banks in the economy.

When you insure it, it will cost you the annual premium.  If you claim it will also cost you the so-called “excess” of about Sh50,000, before any repair is made and before the insurance company will pay the balance.

Over a lifetime of insuring, the great majority of policyholders will pay more in premiums than they will ever claim in compensation.  They will always pay in advance. They will never get a refund.

What you are doing is: first, complying with a legal requirement; second, spreading major financial shocks (with a smaller but still definite loss); third, getting some peace of mind by protecting yourself against “unaffordable” losses big enough to change your life - damages you don’t have the means to meet or rectify.    

In principle, insurance only covers the customer, not the victims, against loss. So, the victim must first take the culprit to court and win an award which inflicts a “loss” on the culprit. So, in Third Party claims, proving “fault” is mandatory.

 That can be an expensive process, with an uncertain outcome, and it can take five years!  But it is only if a High Court Award of Liability and Quantum orders the culprit to pay that the culprit will have suffered a personal loss, at which point, and not before, his Third Party insurance will be obliged to pay on his behalf. 

Another possible scenario is that an owner-driver with Third Party cover is involved in an accident that does not involve outsiders, but in which his passengers – often his wife and children, are seriously injured.

Third Party will cover the family members, but not the driver. And a wife might have to sue her husband to get the payment (five years later), which will still not cover his own medical bills.

Insurance executives do of course have the discretion to agree a settlement more promptly, and this ethical issue is among the distinctions between reputable and opportunistic companies.

In some countries, insurance companies have a knock-for-knock agreement between themselves, with any disparities mutually covered by savings in legal costs, and where an insurance ombudsman might take a dim view of “profitable” delay. 

It is also one of the factors that might encourage an upgrade from Third Party to “Comprehensive” insurance, which includes act, fire and theft cover, and also pays the customer for his own damage and injury costs, irrespective of whether the customer was the victim or the culprit. 

So, even while you are waiting for five years for someone else’s Third Party insurer to pay, your own insurance will help repair your damage immediately. And the best will represent you in court.

But here comes the small print again. When a claim is paid the customer first has to pay an “excess” (e.g. the first Sh50,000) and will lose his no-claim discount, increasing the premium when he insures afresh.

Given the time and administrative palaver involved, that means it is unlikely to be worth claiming for damage costing less than Sh100,000…which is more than 99 percent of “fender-bender” accidents cost to repair, so no claim is made even though loss has been suffered. Fair enough; for the individual motorist that is an unwelcome but affordable cost; for an industry covering millions of individuals these minor repairs would add up to a fortune.

Insurance companies reason that avoiding these costs helps keep premiums down. But they are not so good at the flip side: there is no provision for an individual customer with an impeccable safety record over many decades agreeing to accept a higher excess (e.g. Sh300,000), in return for a lower premium. This puts the kibosh on one of the most rational approaches to insurance:

Don’t try or expect to insure against “minor” items or events that you can pay for out of your own pocket (albeit with a grimace) without changing your life. Insure only against shocks that are “unaffordable”.

A first principle of the insurance business model is that a customer should never-ever “profit” from any cover.  A policy should only cushion the degree of loss.

Professional actuaries (people who predict real outcomes from statistical evidence), tell insurance companies how much they will have to pay out per, say, 1,000 customers. Premiums are set accordingly, with a handsome margin.

All policy income is received in advance (and invested at strong interest rates) and there are no refunds if there are no claims.

No Claim Discounts are given progressively, but halt at around 50 percent, and however many years of no-claims you have on your record, you will pay a higher and probably full premium again as soon as you make a claim.

Insurance might offer immediate relief for marginal claims, but claiming will cost you more in the long term.

Insurance companies are risk averse. They know (!) what the claims total will be, exclude almost everything that cannot be known, and a handful of downsides are amply covered in advance by the other 99 percent of customers who claim nothing.

That’s not really a risk. The same does not apply to you: your personal consequences are a one-to-one risk. The industry’s risk is one in a hundred.

If you over-value your vehicle, the premium will increase (without assessment), but if you claim the pay-out could be based on a reassessed lower value. 

If you under-value the vehicle to reduce the premium, any pay-out will be based on the under-value and then reduced further by the proportion of the under-valuation. That is, if you insure for half the real value, you will be paid half of the value you declared.

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