Car Insurance Excess – How It Works?

Ever wonder how your car insurance excess works? Want to know how you can use this excess to your advantage?

In this article, you will learn what an excess is and how it works, why insurers want to implement it and how can you use it to your advantage.

What is An Excess?
An excess is the first portion of any claim that the insured person must pay for before claiming the rest from the insurer. If the cost of the total claim does not exceed the excess, the insurer does not have to pay at all. Putting it simply, the higher the risk the insurer carries, the higher the excess will be in the insurance policy.

How Does an Excess Work?
For example in Figure 1, the excess of your car insurance is $500 and the total amount of your claim is $1,500. You as the insured person have to pay the first $500 and the other $1,000 is paid by your insurer.

However, in Figure 2, the excess of your car insurance is $500 and the total amount of your claims is only $400, the insurer will pay nothing.

Why do insurers want to implement it?
There are a numerous reasons for insurers to impose an excess for a car insurance policy.

• To reduce the number of small claims from car owners and to encourage greater responsibility in car owners for their part of the loss.
• To reduce accountability of the insurer in larger claims through the excess amount. Also, with lower liability of the insurer, the insurance premium is also lowered.
• To reduce the costs incurred to service claims as there are fixed costs incurred to service each claim and it doesn’t make economic sense for the insurers to attend to each and every small claim.
• Higher excess may be offered to car owners with bad claims experience in order to make car insurance viable and in force.

How can you use the Excess to your advantage when buying a car insurance policy?

• Opt for higher excess as this reduces your car insurance premiums.
• The higher the excess, the lower the liability of the insurer, and thus the lower the car insurance premium costs.
• Different insurers offer different excess amounts depending on the type of the driver insured (age and experience). Look for one that benefits your profile most.