Why Does My Insurance Increase Even Though My Car Value Decreases?
Why does our insurance premium continue to rise while the value of our vehicle depreciates? We had a look at all the reasons, and more.
Published: Friday, April 20th 2018
Here’s the burning question; why does our insurance premium continue to go up and up while the value of our vehicle depreciates?
The moment you drive your vehicle off the lot and into the big, wide world – your car immediately loses value. As the years go by, the vehicle sustains wear and tear, builds up dirt in those hard-to-reach places and may even gather a couple of dents and scratches. Over time, it’s just not worth as much as it was the day you bought it.
There are exceptions to this rule, such as classic or collectible cars, which gain value instead of depreciating. This isn’t the same kind of value, though, and it’s important to make that distinction. These cars are only valuable because we, as sentimental creatures by nature, have created that value in them. They’re rare, they’re beautiful, they’re not your 2007 Opel Corsa.
Another important factor to keep in mind is that one thing has nothing to do with the other. Cars depreciate over time, this we know. Everything we own depreciates in value. And then, prices go up due to a number of factors, such as inflation, rarity of car parts over the years, etc.
The question we’re really asking is; how does this even make sense? And in order to answer that question – we contacted Wynand van Vuuren from King Price Insurance. King Price is the only insurer in South Africa which lowers the cost of your monthly premiums as the value of your car depreciates.
How do they do that, and why?
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Why Does Our Premium Go Up?
According to Germaine Meyer, CompareGuru’s own Head of Broker Department, the main reason we see hikes in the premiums can be attributed to inflation and the rising cost of cars in general. The price of car parts and repairs goes up, or the older parts become harder to source, mechanics and panel beaters hike the cost of labour, etc. This year, in particular, South Africa also saw a 1% increase in VAT.
Then, of course, bad driving, fraudulent claims and the growing frequency of claims also play a big part. While insurance companies try to keep the premiums the same, sometimes an increase is just unavoidable.
King Price premiums are primarily based on each client’s individual risk profile. Van Vuuren says that if a client moves house and has to park on the pavement rather than in a locked garage, this will affect the cost of the premium. Other risk-based factors include driving significantly more KMs in rush-hour traffic, changing a car’s regular driver to someone younger and less experienced, and a history of high claims.
Why Do Cars Depreciate In Value?
Van Vuuren says that just like many other assets, cars depreciate in value over time. Its common knowledge that the older a car gets the less it’s worth. The rate of depreciation varies between models, and is recorded monthly in the Auto Dealers’ Guide.
The only exception to this, as stated above, are some vintage cars and specific models from certain manufacturers which don’t depreciate. These may even increase in value if they’re well looked-after.
Van Vuuren also says that there isn’t much the average motorist can do to prevent the value of the car from depreciating. Even if you keep your car’s mileage low and bodywork in tip-top condition, the age of your car affects its value.
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How Is King Price Able To Offer Something Different?
Though the drop in the price of premium may not be exorbitant, it’s still a wonder that King Price is able to offer this to its clients. How is this model sustainable given the constant rise in older model parts due to inflation and rarity?
Van Vuuren offered some insight into why they do this.
“King Price is the only insurer (in the world, as far as we know) to decrease premiums monthly as the value of your car depreciates. We just think it’s the fair and logical way insurance should be done.
Repair costs only account for a portion of your premium. The rest of your premium caters for total loss, like theft, hijacking and a write-off following an accident. The way we see it, this part of your premium should reduce monthly because the insured asset is worth less every month.
Older cars that are no longer under warranty may see increased part prices but sourcing parts from alternative manufacturers can compensate for price hikes.”
You may also find yourself asking; at what point does the cost of your premium outweigh the value of your car? When can a person assess what they’re paying and say ‘it’s just not worth insuring anymore.’
“As long as your car has value and you, as a driver, are exposed to liability towards other road users in terms of damage or injury caused by you and your car, you’ll never reach this point,” says van Vuuren. “Third party liability can run into millions of Rands, and is covered by your car insurance.
If it gets to a point where you’re prepared to run the risk of self-insuring your car, or risking the total loss of your car, you should still keep yourself insured for third party liability.”