Last week a very important aspect was raised on the Carte Blanch Consumer program on Mnet on South African television. This dealt with the relationship between your insurance premium and the market value of your car, and more specifically the depreciation of your vehicle!
This is a very important aspect of consumer protection – the need to create awareness that the market value of vehicles declines – and the need to insure that your car insurance premium takes this fact into consideration.
This is however not a matter to be fully discussed in the available 10 minutes on television- as it also should make reference to a few other aspects of ownership of that vehicle over an extended period of time. We would like to refer briefly to a few important facts to consider in any discussion on the depreciation in value of your vehicle and the need to adjust car insurance premiums.
- At the time of purchase of your car, the car insurance premium is calculated on the value of that car, i.e.R200,000.00.
- Your car insurance premium is the amount payable to replace that vehicle or repair that vehicle in the event of vehicle loss or damage.
- The market value of that vehicle declines every year – and should vehicle loss occur after a few years – the market value might have declined to i.e. R120,000 – and the car insurance policy would only pay out this amount in the event that your vehicle is stolen or written off.
- This creates the need to monitor whether your car insurance premium should not have been reduced every year in line with the reduction of market value of your car…
Why does my car depreciate in value?
Depreciation describes the effect that wear and tear, usage, mileage and economic conditions have on the value of your car.
It is common sense that as you drive out of the dealership and start adding miles on the clock, the vehicle will be of less value to any other potential buyer. It is generally agreed that new cars lose up to 15 percent of their value once they are driven out of the dealer’s showroom.
A report on the motoring industry released in 2007 revealed that some models of brand new cars reduced by 10% to as high as 40% within the first year of ownership.
The car insurance policy only covers that market value – and not the purchase price you paid for the vehicle.
Why does my car insurance premium not reduce directly in line with the depreciation in value of my vehicle?
It is important to recognize that there are also factors contributing to upward pressure on car insurance premiums.
- Normal inflationary pressure can increase car insurance premiums by anything between 5% -15% yearly
- Increased perceived risks as a result of vehicle damage [accidents , potholes] or vehicle loss [accidents, crime]
- Even though your vehicle might reduce in market value – the costs of repairing such a vehicle after an accident might still increase.
- Vehicle parts needed for repairs might continue to become more expensive despite the market value of your car decreasing.
This is perhaps an explanation of why there is not an automatic reduction in the car insurance premium in line with the depreciation of your vehicle – and also why it might be a good idea to tie down the insurance premium for 2 or 3 years.
Advice to vehicle owners
The Ombud for Short Term Insurance has recently criticised an insurer for not mentioning in his car insurance contract renewal letter that a reduction in the value of his vehicle could result in lower premiums. It was also emphasized that a broker should not merely convey letters from the insurer to the client but advise a client of the need to review his policy.
We would like to advise vehicle owners as follows:
- Tell your insurer or broker that you want your car insured at its market value.
- This is the amount a reasonable buyer would pay for it and is based on research published by Mead and McGrouther – this is the mysterious “blue book” dealers often refer to when they are evaluating your car for a trade-in.
- Motorists must, at all costs, avoid insuring their car below the actual value in an effort to save on insurance premiums.
- Don’t leave it up to the insurer to reduce the value, review your insurance yearly and ask them to implement the change.