If you’re serious about making better money choices, you’ll understand the value of having personal and business insurance to protect everything that’s important to you. Think of it as investing in your own peace of mind. Buildings, house contents and vehicles are significant assets, so it’s wise to insure them against loss or damage, whether it’s caused by accident, fire, theft or legal liability.

Likewise, because we can never predict the future, you’ll also want to protect your income and your lifestyle against unexpected threats, while ensuring that your family is equally secure if you should pass away suddenly. For that, you might consider income protection insurance, life insurance, credit life insurance (with retrenchment and disability benefits) and funeral insurance. Key-person insurance, business interruption insurance and third-party liability insurance offer similar protection to businesses.

In return for covering you against the insured events listed in your policy, your insurer charges you a monthly premium, and you may also have to make an excess payment on any claims. Insurers calculate your premium according to several risk factors, so the amount you pay will vary according to your unique risk profile and claims history.

Insurance as a safety net: Finding the right balance

Knowing that you’re covered against losses is a great reliever of financial stress. However, the relationship between policyholders and insurance companies is a difficult balance. Understandably, as a policyholder you want to be covered against as many losses as possible for the most affordable premium. But you’ll also understand that to stay in business and continue offering you a safety net whenever you need it, in the long run your insurer needs to earn more than it pays out – that’s a basic rule of business.

That’s why the loss ratio is an important factor that insurers consider when calculating your premiums.

How the loss ratio affects your premiums

The loss ratio is simply a measurement of the amount the insurer has spent on a policy (the claims paid out plus adjustment expenses) as a proportion of the premiums the insurer has earned from the policyholder.  

Insurers calculate a loss ratio using this formula:

(Insurance claims paid) + (adjustment expenses) / (Total earned premiums)

Reducing the loss ratio is essential to maintaining a healthy insurance sector. It’s obvious from the formula that as a policyholder, you will drive up your loss ratio if you make frequent claims on your policies.

Insurers see a history of consecutive claims as a sign that you’re likely to claim again and again. Most insurers have a more tolerant attitude to claims caused by extreme weather or other natural disasters, but if you tend to claim regularly for the same type of loss, or you file many claims in a short period of time, you may become known as a multi-claimant. Different insurers will apply different standards when deciding how many claims are too many, but consecutive claims could push your loss ratio up to an unacceptable level. Your insurer will be forced to increase your premiums – or may even choose not to renew your policy.

You may be thinking, ‘Well, why should I get insurance if I’m not going to use it?’ but that’s not what we’re suggesting. As with all things, balance is the key. Yes, you can submit an insurance claim whenever you’ve suffered a loss covered by the policy. But first, consider all the factors contributing to the situation. Is there anything you can do differently, or any habits you could change, to make it less likely that you’ll suffer the same kind of loss over and over again? Do you want to claim when you could replace the loss for less than the excess you’d pay?

All we’re suggesting is that you be mindful of your choices and aware of all your options before you make a claim. If you consider all the factors including your loss ratio, you can make decisions that deliver the best outcome for your financial management overall.

Tips to avoid excessive claims

What can you do to lower your loss ratio? Consider the following strategies:

• Make prudent claims
  Only claim for losses or events that have a serious effect on your finances. It might be more cost-effective to handle small or regular costs yourself.
• Reduce risks
  Add safety features like security systems to your home, keep your property well maintained and learn how to drive defensively. You help lower the loss ratio by making insured events less likely to happen.
• Review your policy regularly
  Talk to your insurance consultant about your insurance policies every few months to make sure they still meet your needs. If your life changes, you might need to change the amount of cover you have.
• Know the terms of your policy
  Get to know the terms and exclusions of your insurance policy. Knowing the limits of your cover, what is not covered, and how to file a claim can help you make smart choices.
• Keep an emergency savings fund
  Set up a backup savings account and keep it topped up. If you can cover small, unplanned costs yourself, especially if they’re less than the excess you’d pay on a claim, you won’t have to file claims as often.

You can help make the insurance market fairer and more balanced by using risk-mitigation techniques, being aware of when and when not to file claims, and working with your insurer to minimise losses.

If you have questions or need help with your insurance, contact Nedbank Insurance.