Excess: What It Is, Why It Exists, and How It Works

Excesses are a well-known component of most modern insurance policies, where you pay an amount up-front even though you pay a sizable monthly premium. Many people find it difficult to understand, at least on a theoretical level, since they believe that the very reason they own an insurance policy is so that they won’t have to pay anything for losses or damages incurred from an unforeseen event. Yet, there remain good reasons why excesses exist and why they are beneficial to the consumer – which we will explore here.

What Is an Excess?

At its most basic level, an excess is an uninsured amount that you pay yourself on any claim you make from your insurer. In essence, it is your contribution to the amount you are claiming for, with the insurer paying out the rest of the claim.

Say, for instance, that you have your car insured at a value of R150 000 and your excess amount is set at 7% of the total claim; if your car is stolen and you successfully claim for the full amount, your excess payable will be R10 500, and the insurer will pay the rest.

Excesses can either be fixed amounts based on the type of claim made or variable amounts based on the amount claimed for.

Why Is Excess Necessary?

The implementation of excesses is a way for insurance companies to minimise their own risks while keeping insurance premiums affordable for the average person.

It minimises the insurer’s risk as it dissuades anybody from making a fraudulent claim and ensures that people are discouraged from making numerous small claims that are too admin-intensive for the relative value of the claim.

If excesses did not exist, the abuse of claims made by some would mean that the average person would have to pay more for insurance to ensure that insurance companies can continue to deliver on their policy agreements.

Excess Is Sometimes Recoverable

In instances where both parties to a claim are insured and the fault rests solely on the one party, the party who is not at fault should be able to recover the excess from the other party’s insurer.

In most cases, however (especially in instances of motor accidents), only one of the parties may be insured, and so the excess may not be recoverable since there is no other party to claim from.

Additional Excesses

There are some instances where you will have to pay additional or situation-specific excesses based on circumstances that may or may not be within your control.

For instance, age is often a determining factor in the amount of excess payable in motor accident claims (which is outside the control of the insured party). Conversely, a theft claim may require a higher excess payment based on conditions surrounding the time and place of the theft (which is within the insured party’s control).

While no-excess insurance policies do exist, the premiums will be noticeably higher and often do not make sense for the discerning and prudent consumer.

The Bottom Line

Excesses are often part and parcel of any insurance policy. Knowing how your excess is calculated and how it applies to your policy is another matter altogether. Always speak to your adviser before you purchase a policy or make amendments to an existing policy. Your adviser will also be able to help you to understand the way excess is determined on your specific claims.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)