The insurance trap
Why you pay more for cheaper cars
GEORGE SAT THROUGH a whole evening last week listening to people complaining about the cost of short-term insurance, especially for cars. A letter in the local paper had triggered the conversation. The writer stated that it was unfair for insurance companies to increase insurance premiums every year, while the value of the car actually decreases. He offered long-winded arguments why premiums should decrease and recommended that motorists should get new insurance every year.
He mentioned that two insurance agents agreed with his arguments. George reckons they agreed with him to get him to shut up.
At first glance the argument makes sense: The value of a car depreciates by 10% - 15% a year. George’s car’s retail value is about R91 600 today – the amount insurance would pay out should something happen to the car – compared to the R145 000 he paid for it less than five years ago. But his insurance premiums have increased steadily every year.
The argument’s not quite correct, says Outsurance. It assumes that there’s a total loss of the vehicle due to a serious accident or that the car is stolen and not recovered. The insurance premiums increase because parts and labour to repair damage to cars are getting more expensive every year.
Dial Direct has found that the vast majority of claims are for vehicle repairs. The value of a vehicle only comes into play if it is stolen or written off. These claims account for less than 10% of all motor claims. The rest must be repaired.
More spare parts must be imported as more and more vehicles are imported. In many cases modern cars need more sophisticated equipment and tools to repair them, which increase the capital costs of equipping a workshop.
Changes in the motor industry and marketing trends have also affected insurance premiums. The increase in the number of different marques in SA, as well as the total number of models, increased dramatically over the last five years, and dealerships need to stock more spares.
South Africans have a choice of nearly 2 000 different new cars, while dealers must also stock spares to repair and service older models. Computer equipment, storage space and the cost of capital all add up to the total cost of the spares.
That vehicles are getting better and smarter also affects the cost of repairs and insurance premiums. Everybody knows that car prices did not decrease when the rand strengthened and made imported new vehicles cheaper. At best, prices remained unchanged.
Manufacturers and importers used the improved exchange rates to add all types of luxuries and extra equipment to cars. In essence, they changed their marketing strategy to offer better cars at the same price.
Today, even the entry-level Ford is available with power steering, a CD player, electric windows, air conditioner and air bags. Unfortunately, these nice things get damaged in accidents and add to the repair bills.
If an airbag deploys, it has to be replaced. Mutual & Federal says it costs from R25 000 to R30 000 to replace a single airbag in a luxury model and R3 000 to R6 000 for an airbag in a smaller car. The most expensive air bag to date cost M&F nearly R56 000.
The insurer says that some luxury cars have up to 48 different computers to manage and measure everything from braking systems to outside temperature and sensors in the windscreen to automatically switch on windscreen wipers when it starts raining.
It’s interesting to note that the spares of cheaper, imported cars are quite expensive. M&F has found that it would cost R41 000 plus to repair front-end damage to an imported car compared with R21 000 for a local car in the same price range.
George can just guess what it’ll cost to replace these new headlights that swivel when the driver turns the steering wheel – those that look around corners – if you happen to rear-end a truck.
Owners need to ensure that their policy covers all the expensive options the deal offered instead of a discount. If an air conditioner or alloy wheels are added as options, it must be noted in the insurance policy. If not, the owner might be liable for the cost of repairs if they’re damaged in an accident.
And accidents are bound to happen – there are more fools on the roads. Sales of new vehicles have broken records month after month over the past two years. The same growth was not seen in building new roads, highways or parking garages.
And if there was no change in the percentage of motorists who drive without licences or use unlicensed and unroadworthy vehicles, the risk has increased phenomenally on our congested roads. If we accept the estimate of 2m more drivers, the risk of being involved in an accident is much higher.
Motorists who have no insurance cover also contribute to the annual increase in premiums of the responsible insured group who realise that accidents can and do happen. It’s probably one of the most important factors that contribute to higher premiums, despite the reducing value of your car.