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An insurance policy excess can have several meanings, it is often a term interchanged with ‘deductible’ and often confused with ‘franchises’ but this blog will help you understand what these terms mean and how to reduce insurance premium.

 

Insurance Policy Excess Explained

Firstly, all these terms are really methods of self-insurance. This is an important point to remember, it is why an Insurer who replaces damaged property will ask you to pay the excess as you are self-insuring that portion of the loss, as opposed to the Insurer repairing the property to a value of the claim less the excess.

Why is it called an Excess?

This term originates in older insurance contracts and it means the insurer will indemnify (pay your loss) up to the sum insured for the amount of the loss that is in excess of your self insured amount. So for example, if your loss is £5,000 and the sum insured is £5,000 or more with an excess of £500 then your insurer would indemnify you for £4,500.

Is a deductible the same as an excess?

No, it is not, however in most cases a deductible would achieve the same result. The difference is that a deductible is an amount deducted from the claim prior to payment by insurers. Whereas this makes no difference to your payment for property which is insured on full value replacement basis, It does makes a difference to the amount of insurance available for other types of policy. An example of a deductible in practice might be money insurance. If a policy has a limit of insurance set at £10,000 with a £500 deductible and you suffer a £15,000 loss, then the policy would pay £9,500 (the limit of insurance after deduction of the deductible)

Franchises

A franchise is like an excess, however once the level of franchise has been passed, the insurer will pay the whole loss. So if you suffer a £5,000 loss and the policy has a £5,00 franchise, your insurer would pay the whole £5,000.

Why do I have a policy excess at all?

Simply to reduce the administrative burden on insurers so they can provide a better price for insurance. Insurance should be viewed as a method for protecting against the unaffordable disaster, not every small mishap. The cost to an insurer of administering a claim of any size is going to start at a few hundred pounds. As these small mishaps occur more often than larger losses, the costs to insurers of providing a service for small claims is significant. These costs will need to be passed on by way of higher premiums for all.

How much should my excess be?

The size of excess will vary between different types of insurance. Business insurances generally start with a £500 excess. If your business has a proven good claims history, you might be able to reduce excesses to £250 but in the long term it is more cost effective to increase excesses and reduce premium if you are not making claims.

If I double my excess, will that halve my premium?

Not necessarily. This is because the excess will only form a small percentage of the total sum insured so the premium applicable will be a small proportion of the total premium.

So that must mean I can reduce my excess for a small additional premium?

Again, not necessarily. This is because small mishaps happen more frequently, so the insurance of a £500 excess is always worth a bit more premium than the insurance of the top £500 of the risk.

Percentage excesses

These excesses are sometimes used where a value at risk changes over time, so a fixed excess would represent different amounts of the risk at different times. For example stock in a warehouse. This is not co-insurance which is where you always bear a percentage proportion of any loss. Insurers will only indemnify the amount of the loss in excess of the percentage excess. Therefore, if you suffer a loss of £5,000 on property worth £25,000 and your percentage excess is 10%, insurers would indemnify £2,500. If there was a 10% co-insurance and no excess then Insurers would indemnify £4,500.

The Average clause and other conditions affecting your claim

The amount of indemnity is always calculated before the application of the policy excess. Therefore, if average applies (under insurance causing you to become your own insurer on a co-insurance basis) therefore, a £5,000 loss with a £500 excess, where average of 80% applies (20% under insurance) the insurers will indemnify £3,500. However, the good news is that cover extensions which increase indemnity, like debris removal or additional costs of working do not attract an additional excess, the policy excess can only be used by insurers once.

Saving premium with increased excesses.

Cost savings are always attractive, but ensure you are getting value for money before increasing your excess. Remember that you are taking more risk at the more frequent loss end of the policy. If you take a £10,000 excess and save £2,500 premium then you will need four claims free years to guarantee a saving. If you are unfortunate and suffer two losses over £10.000 in the same year, you will need to have another seven years claims free to show a saving.

How to choose the right excess.

Speak to your professional insurance broker for advice on how to audit your business risks and set an excess that provides a net cost saving over the long term. We have the expertise and experience to understand how risk of loss trends over time and to help you assess your financial stress point, or the level to which your business can comfortably retain risk.

To discuss this post and get advice you can call us now for more information on 0845 4310 448 or email us at enquiries@butlerevans.co.uk

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