The confusing world of insurance excesses

I’m the first to admit that I spend a little too much of my time reading insurance policy documents. But my excuse is that someone has to – I’m fairly confident that most people who buy them don’t bother.

They are ever more complex than they once were. And worse still, elements that we consumers used to once take for granted are no longer quite what they used to be.

Comprehensive car insurance, for example, can now mean a multitude of things. Some policies that describe themselves as comprehensive truly are – while others are pushing the definition of the word to the extreme.

Another important area that has shifted over the past few years is the way insurers handle the so-called “excess” – that’s the part of each claim that you, the customer, has to pay.

Not so many years ago, insurance policies came with just one excess. These days, it’s not uncommon to have to deal with voluntary excesses, compulsory excesses – as well as different excesses for different types of claims.

Quite how customers are supposed to keep up with this I don’t know.

What's in a name?

For me, the problems with excess start in the word itself. It doesn’t mean anything to the average customer. Its roots come from the idea that it is the excess of what the insurance company has agreed to pay out. But this doesn’t make much sense as each claim is a different size. The Americans call it a “deductible” which – while not being a pretty word – makes much more sense. It’s the amount that is deducted from your claim. Simple.

But the word “excess” is so engrained in the UK insurance industry that I fear we’re stuck with it. And where it gets more complicated still is the way that different insurers deal with it.

If you buy your insurance through a comparison site – as an ever larger number of us do these days – you’ll be asked what “voluntary excess” you’d like to pay.

What’s not always so clear is that the sum you opt for may be included within – or added on top of – your chosen insurer’s “compulsory excess”.

It’s impossible to answer a question about how much excess you’re willing to volunteer – if you don’t know what you’re going to be forced to pay. Comparison sites and insurers need to start asking us about the total excess that we’re willing to pay – and if that’s not high enough for their liking, then they can let us know.

So watch out for that one. Many people have been caught in the trap of volunteering the excess they want to pay – only to find out when they come to make a claim that their insurer has doubled up on them.

Higher excess, higher premiums?

The next trap to avoid is making the assumption that the higher excess you volunteer for, the lower the premium you’ll pay. Sadly, this is no longer true.
These days, insurers look at what the average person is willing to pay, and if you push your excess up too high, they put you in the crazy bucket and start putting up your premium for being too desperate.

But if you’ve managed to successfully navigate all that, don’t think your work is done. When you come to make a claim, you may discover that the excess you’re hit with bears no relation to the voluntary, compulsory or total excess that you were told about when you bought your policy.

These days, most car insurers charge different excesses for different types of driver. So, they might impose a much higher excess on your children than they do on you, for example. They may also charge different excesses for different types of claim.

So you might have a £100 excess on your home insurance, and if your home is burgled, that’s exactly what you’ll pay. But if your house slides down the hill because of subsidence, it’s quite probable that you’ll be charged an excess of up to £1,000 – maybe more.

Or if you’re struck by what the insurance industry calls an “escape of water” (that’s a leak to you and me), once again, you could find that your excess miraculously rises.

Competition's not always a good thing

If you’re looking for someone to blame for all this, I’m sad to say that comparison sites - and the competition they have created – must shoulder much of the responsibility.

It wasn’t their intention. But by allowing customers to compare dozens of brands on price, they have forced insurers to lower their headline price to compete. If you’re the 20th most expensive brand on a comparison site – there’s little chance of you winning the business, so you’ve got to get yourself near the top (at least for certain sets of customers).

As prices have fallen, insurers have looked for every possible way to recoup some of that lost revenue via the backdoor. You can’t really blame them either – most of them struggle to make a profit on things like car and home insurance.

Many insurers readily recognise that they’ve unintentionally created a confusing headache for customers. But there’s no way back now – everyone’s doing it. That’s why the regulator needs to step in and sort it out.

But until it does (if it ever does), take care.