It pays to hunt around and examine the pros and cons of each available policy, writes Maya Fisher-French
Last month, I cancelled my online short-term insurance policy when an insurance broker was able to beat the quote.
I was selling my old car and buying a new one, so I took the time to do some quote comparisons of direct insurers via the website hippo.co.za.
Across all of those quotes, the insurance broker quote was still about R100 cheaper, and had better cover and a lower excess.
This seems counterintuitive. Surely if you go direct and do not incur commission costs, then you are saving money?
Apparently not, according to Andrew Coutts, head of intermediated distribution at Santam.
I specifically approached Santam for this question because it happens to be the underwriter for both the direct insurance policy and the policy through the insurance broker I’m dealing with. So, I am ultimately insured by the same company but paying a different premium.
As Coutts explains, direct insurance has as many costs to incur as a broker insurance model. Instead of commissions, they have to pay for marketing and ongoing services such as a call centre and website, costs that are normally borne by an insurance broker and paid for by the commission earned.
This was confirmed when I studied the Financial Services Board’s short-term insurance report for 2014. When it came to acquisition costs, insurance companies that sell through insurance brokers had high commissions but low expenses, while direct insurers had low commissions but high expenses. The overall costs were similar.
Risks determine premiums
While some direct insurance marketing may suggest that you are saving by cutting out the “middle man”, the numbers don’t support this.
The real driver of premium pricing is how your insurer views your risk profile and the extent to which it applies risk rating.
That was the success behind direct insurer OUTsurance, which used sophisticated risk-rating data and analysis to provide lower-cost insurance to low-risk customers. It is now the largest direct insurance company in South Africa.
While certainly ahead of the curve in terms of risk analysis, many large insurers have caught up and are offering equally competitive quotes via their broker force.
Number of policies affects premiums
Having more than one product with your insurance company will also lower your premiums. In my case, only my car is insured through the direct insurance provider, while my house and household contents are insured through the insurance broker, hence a further discount on premiums.
Coutts explains that insurance companies reward you for having more insurance with them, because it lowers the overall risk and increases the levels of retention.
So, if the real pricing difference has less to do with the channel I am purchasing insurance through and more to do with my risk profile and number of policies, which distribution channel works best?
For individuals who want to be able to go online and insure their car and have no need for a broker relationship, online insurance definitely fills a space.
I have household insurance and a two-car family (which will soon become a three-car family when my son starts driving), so, all things being equal, I prefer the broker model, especially when it comes to the claims process.
One of the advantages of a commission-based structure is that the broker is paid on an ongoing basis to service the client. It is in their interest to ensure that the company pays out if I have a claim, because an unhappy client moves on.
A large insurance brokerage has a lot more clout with an insurer than I would as a single client, so it is more likely that my claim would be processed and, best of all, it means I don’t have to deal with a call centre any more.
HOW TO CHOOSE
CHECK THE COMPLAINT RATIO
When selecting a short-term insurer, cheaper is not necessarily better. When comparing quotes, I discovered quite a discrepancy in cover between insurance companies.
Some insurance providers had a high excess, while others automatically included a 30-day car hire clause in the case of an accident.
When it comes to household insurance, all-risk cover, which covers items you may leave home with, such as a watch or laptop, can be treated differently. Some insurers cover all risks, while others require you specify the items – so you need to make sure you’re comparing like with like.
You also need to know that when you claim, you will be paid out. Before signing with an insurer, study the Ombudsman for Short-Term Insurance’s report (osti.co.za) to find out how many complaints were received about your insurance company.
The average number of complaints received about an insurance company is about three for every 1 000 claims.
Insurers like OUTsurance and Santam – at two complaints per 1 000 claims – have a good ratio.
A complaints ratio of 13 to 1 000 claims for King Price Insurance, for example, would be a red flag. Even though many of those were found in favour of the insurance company, it suggests that there may be a lot of fine print that customers are not aware of. – Maya Fisher-French
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