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Insurance Excesses

Tuesday, 02nd July 2013

An excess is an amount that must be borne by the insured party in the event of a claimable loss under the policy, over and above which the insurer will pay up to the sum insured for the rectification of the damage.

The level of excess is set to reduce small, high frequency claims that ultimately adversely affect the premium the insurer requires to continue to cover a certain type of risk.  For example, small claims usually cost as much again in administrative costs to an insurer.  These claims also erode the premium leaving little to cater for major losses such as a large fire, storm or other catastrophic event.

An insurer may impose an excess due to poor loss history which, if not reduced or managed, could make the insurance of the property cost-prohibited.  Therefore and insurer will set a level of excess that allows it to provide the insured with a level of protection at an affordable price.

If not managed, these costs have a flow-on effect and eventually find their way back to the insured.  Therefore the excess provides a two-fold benefit: It allows the insurer to control these types of costs, thereby retaining a level of market competitiveness and - for the insured - this means curbed insurance costs and more choice over the long term.

Should we consider a higher excess?

The most important aspect is selecting the right excess amount to achieve the desired outcome.  Therefore you need to understand the condition of your strata property and how robust your maintenance program is.  Whilst maintenance is not covered by insurance, active maintenance and keeping property in a good state of repair generally results in properties experiencing less claims and encountering only unforeseen events, like storm or fire.  Regular storm claim damage following small storm events is exacerbated by lack of maintenance.  Items such as loose roof sheeting, wall cladding, bad guttering, cracked roof tiles, or fencing that is leaning or has pressure on it can result in additional damage.  In the long term, such properties not only pay more for their insurance but their property assets diminish through lack of regular maintenance.

Factors to consider are:
  • Selecting an excess based on how much the Owners Corporation can bear annually as a cost versus the premium saving that this will produce.  Having a regular maintenance program covering all your strata property requirements will help reduce the frequency of claims.
  • The current loss history of the property and the potential impact of the excess upon that loss history in the future.
  • When looking at obtaining quotes for various excesses, the consideration should be based on reasonable variations to the standard excess on a policy.

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