Insurance lingo a write-off

Insurers don’t always make it easy. Knowing what to watch out for could be worth thousands,

Car insurance policies come in several flavours, with different rules on what you’ll get.

Take a deep breath before you open your next car insurance bill. Premiums have risen 24% in the past five years – a hike to rival even the skyrocketing cost of food.

Owners of flood-damaged vehicles after the recent deluge in Auckland will doubtless be banking on their insurance cover – if they were able to afford it – to see them right.

It’s likely many of these cars will be considered write-offs. They’ll join the cast of others written off either because they couldn’t be repaired or the insurer deemed it ‘‘uneconomic’’ to do so. The odds of the latter have increased as repair costs also rise.

So, in the unhappy event it’s your vehicle on the write-off list, how much will your insurer pay out? Depending on the type of cover – and whether your insurer is playing fair – you could find it’s thousands of dollars less than the sum insured on your policy.

Par for the course in an industry where things are seldom straightforward, car insurance policies come in several flavours, with different rules on what you’ll get if your vehicle’s a total loss – insurance-speak for cars stolen, or considered unsafe or uneconomic to repair.

There should be little room for doubt about the amount if you have an ‘‘agreed value’’ policy, where you and the insurer agree on what the car’s worth at the time you take out and renew your cover. The agreed value (less any excess you’re required to pay) should end up in your pocket.

But it’s a different story with ‘‘market value’’ policies, which leave it to the insurer to determine a vehicle’s value. This value is based on what the car would have been worth on the second-hand market just before the event that led to the claim. You’ll have to argue the point if you think the sum is unfair.

And it might be worth the argument: UK insurers have recently been warned for short-changing customers by offering them less than a fair value for vehicles written off after an accident. In some cases, the insurer only increased its offer when the customer complained.

There’s also another flavour of policy lurking in the car insurance market that’s known as ‘‘sum insured’’. With these policies, the insurer will pay either the sum you insured the vehicle for or its market value, whichever is less. So good value for the insurer’s books, but not necessarily for yours. Full marks to the marketing guru who dreamt up this cover.

Unsurprisingly, the industry’s lingo is catching out some customers.

One hapless couple who thought their vehicle was insured for an agreed value discovered they had only market value cover when they put in a claim. Their vehicle was considered uneconomic to repair after being sideswiped by another driver in a car park. The payout from the insurer was several grand below what they expected.

Customers are often rebuked for not reading the terms and conditions of their policies.

But the flipside is that insurers don’t have a good track record in writing policies that can be easily understood by the people paying for them – and paying increasingly more.

Revenue v claims

Industry figures show car insurance is a big earner for general insurers and revenue has grown significantly in recent years.

Data published by the Insurance Council show net earnings from motor vehicle premiums topped $1.85 billion in 2021.

While revenue is up, the claims ratio for car insurance has dropped. This ratio tells us the amount paid to customers in claims as a proportion of the income earned from premiums. In 2017, 77% of premium income was paid out to customers in claims. Last year, the figure had fallen to 67%.

Part of the drop is likely due to Covid-19 lockdowns when we weren’t driving as much and claims fell.

It’s harder to pinpoint what other factors may be at play, or whether some companies are choosing to keep a much bigger slice of their customers’ premiums than others. There’s no requirement for individual insurers to disclose their claims ratio and the information isn’t routinely published.

But with premiums continuing to rise, shining some light on what we’re getting for our car insurance dollars seems only fair. As insurance costs and climate change hit home, more customers may well decide to swap four wheels for two.

Jessica Wilson is a researcher and writer specialising in consumer law and related issues.