After saving up and paying for her own driving lessons, 24-year-old media graduate, Michelle (who asked not to be identified) fully understood the importance of car insurance when she took out bank finance for her first car this January. 

Her 2023 VW Polo Vivo 1.4 Trendline was duly insured via MiWay, which is a subsidiary of Santam for a monthly premium of R1,710.99. About two months later, Michelle was involved in a car accident when the car aquaplaned in wet weather, skidding into an oncoming car. 

“It happened at night. I wasn’t injured but my car had to be towed away, and the other car was damaged,” she says. The broker did arrange for the car to be towed but then informed Michelle that she was liable to pay the insurance excess of R55,000 before the insurance claim could be processed.

The office of the Ombud for Short-Term Insurance (Osti) explains that insurance is taken out when you cannot afford to pay for a loss yourself.

“An excess is designed to eliminate small-value claims which have a high administrative cost relative to the value of the claim. Eliminating these claims and their associated costs helps keep premiums lower for you and other policyholders. An excess also acts as an incentive to ensure that you take responsibility for the safety and security of your possessions,” the Osti says.

However, excesses in the car insurance industry typically range from 2.5% of the claim, to R3,000, R5,000 or even R10,000. So, the R55,000 excess seems, well, excessive. When Michelle first sent me her complaint, I thought it must surely be a typo where someone had accidentally typed in an extra zero. Apparently not.   

MiWay says excess terms and conditions are explained in a transparent manner to clients in detail, and multiple scenarios are covered, from a total loss impact to a driveable accident with actual financial impact explained during the time of a claim. 

Three different scenarios

“In this case, this [explanation] was done on two separate occasions with three different scenarios explained to her. During the needs analysis with the client, it also became evident that she wanted to save on her monthly instalment on insurance — therefore her [choice to] opt for a higher excess,” says Burton Naicker, the chief executive of MiWay. 

He admits that a “very minimal number of MiWay clients opt for an excess of this value” — only 0.6% of MiWay personal lines vehicle insurance policies have excesses of R55,000 or more. 

“MiWay’s excess referral limit is capped at 30% of the value of the vehicle. The excess on [Michelle’s] policy accounted for 23% of the vehicle value, and as a result, the referral process was not triggered,” he says.

The policy document has a single notation under “needs analysis” — cheaper premiums. However, DM168 has heard the recordings, and the explanations on the part of the insurer were quite clear. A manager had to step in to authorise the excessively high excess and document that it had been requested by and explained to the client.

In some cases, insurers will ask for an additional excess, for example, where the driver is less than 25 years old or has had a driver’s licence for less than two years. Although both of these were applicable to Michelle, there was no additional excess noted on the policy for this. However, if she was involved in a single car accident, for example, she drove into a pole, her excess would jump to R58,000 and there was also an additional excess of R5,000 for any claims within the first three months of taking out the policy, which means her excess payable in this case is R60,000.

Affordability assessment

Ernest North, the co-founder of fintech Naked Insurance says an insurance broker should have done an affordability assessment and financial needs analysis (which clearly would have failed). 

“But even as a non-advice broker, the broker’s FAIS [Financial Advisory and Intermediaries Services] legislation responsibility includes making sure the client understands the significant aspects of their cover. To the extent that the client had exposure to the insurer, the insurer also needed to prominently communicate this,” he says.

North adds that irrespective of the role the broker played, in accordance with the Policyholder Protection Rules, as an extension of the short-term insurance act, the insurer has a responsibility to make sure the client knows about and is comfortable with the most important aspects of their policy. 

“A R55,000 excess certainly falls in that category. This is one of the flaws of traditional sales processes that span multiple channels: some things get said over a phone call (after 40 minutes most clients are not really paying attention any more), some things get said via an email or an attachment to that mail, that may or may not be read, and key information easily gets lost,” North says. 

Naked uses an exclusively digital interface via app and website, which keeps costs low but also ensures that all elements of cover are clearly explained with no risk of misunderstanding.

While it is true and widely understood that you can raise the quantum of the excess you pay in order to reduce your monthly insurance premium, most financial advisers would tell you that before you do so, you should be certain that you have sufficient savings or cash available to settle the excess in the event of an accident. 

For example, you might take out an insurance policy with an excess of R3,000, and after saving up a lump sum of R10,000, you could then go back to your insurer, increase the excess on the policy and reduce your premium.

“It makes sense for insurers to give clients some degree of choice on how they want to balance excess vs premium, based on their own cash flow, risks tolerance and financial backup reality, but the size of an excess should not invalidate the principle that the bulk of the risk should be borne by the insurer, that’s what the product is for,” North says. 

Naked’s maximum excess payable is R20,000 and is never given as a default option on a policy but has to be chosen explicitly. 

A write-off

MiWay informed Michelle that the car was deemed a write-off. “MiWay will settle the retail value of R292,200, less the excess of R60,000, so a settlement value of R232,000 will be paid to the bank,” Naicker says. 

This would have left Michelle out of pocket and without wheels, as she did not opt to include MiCredit Shortfall on the policy, which would have paid out all the money outstanding to the bank including interest and fees. She spoke to MiWay and decided that she will use the insurance payout to try and get the car repaired instead.

Tyrone Lowther, the head of Budget Insurance, cautions that although increasing your excess amount can mean big savings on insurance premiums, the reality is that at the time of a claim, the excess amount will need to be paid. 

“Increasing your excess is a suitable option if you are a low-risk client. If you are unlikely to make a claim, a high excess can work very well. On the other hand, if you are high-risk — perhaps you are vulnerable to car theft or house break-ins due to the area you live in — this can be a bad financial decision,” he says. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R25.