The in­sur­ance trap

Why you pay more for cheaper cars

Finweek English Edition - - Creating wealth - BY ADRI­AAN KRUGER adri­

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.

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