Cedric Stephens Question: Car prices seem to have dropped over the last two years. The price of my 1991 VW Passat fell by more than one-third
between 1998 and 2000. The valuators priced it at $210,000 recently. Two years ago its value was $320,000. What "hit me for six" however, was my insurance premium. I am now paying more in spite of a 60 per cent No Claims Discount and the lower value. This is due to a minimum premium. It is dishonest for the company to impose such a charge. I doubt that my claim will be settled for $210,000. Can the minimum premium be justified?
-- G.B., Kingston 7.
Answer: Do you want to hear a secret? It may help you understand the idea behind minimum premiums. Insurers are quietly jacking up their rates, on all lines of coverage. The market has changed -- much like that for cooking gas. Buyers no longer rule. Insurers are using various methods to get more money from consumers. Some experts say this is only the start. More increases will come on stream during the latter part of 2001. Minimum premiums are a part of this picture.
Are the premium increases justified? Insiders say that the industry performed poorly during the 1990s. The market contracted. Premium rates fell sharply. Claims grew while return on equity declined, in spite of high interest rates. The cost of reinsurance has started to climb. The industry recorded an underwriting loss of $2.8 billion between 1994 and 1999. Motor, the largest class, was the main cause. In 1999, it accounted for 64 per cent of gross premiums and 93 per cent of the $562.3 million [underwriting] loss.
Companies have gone overboard with minimum premiums. They use it to levy increases over and above what is reasonable. When inflation rates are in single digits it is not politically correct to impose large rate increases. Since the majority of vehicles on the road are "old," minimum charges allow insurers to get more premiums from more customers with fewer hassles. Most customers tend to grumble when faced with this. Few of them actually change insurers because of it. Insurers understand this. This is why so few of them make any distinction in the charge between new and existing customers. This practice is wrong. It is not justified. Overheads incurred with a new customer are higher than those of a customer of many years' standing are.
When a minimum premium is applied to a motor policy, it effectively cancels the No Claims Discount [Bonus] Clause. Insurers seem to have ignored this point. The clause however, does not give them the right to do this. It says quite clearly: "In the event of no claims being made or arising -- during the period of insurance -- the renewal premium -- shall be reduced--." There is absolutely no reference to minimum premium.
When insurers calculate a renewal premium, reduce it by the no claims discount and then impose a minimum charge -- instead of the difference between the renewal premium and the no claims discount -- this is the equivalent of a three-card trick. Their actions are not consistent with the policy. In other words, they are violating the terms of a contract they drafted. They are also introducing a new condition in the insurance, via the back door. This conduct could be in violation of section 37 of The Fair Competition Act. The Act imposes a duty on insurers [among others] to disclose material information to consumers to make informed decisions.
My advice to you is simple. Be pro-active. Shop around. Obtain quotations from other insurers. Make sure you find out if they have minimum premiums. Compare their premiums with those of your insurers. Use the information to negotiate better terms with your insurers. If they do not play ball, move. This is one way you can combat the price increases that will be taking place in the insurance market during this year.
Cedric E. Stephens is the founder of INSURANCE HELP-LINE, a telephone-based advisory service, and the co-host of Risky Business, a radio programme that deals with risks and insurance. If you need free advice write to The Financial Editor or Mr. Stephens at aegis@cwjamaica.com.
