The pros and cons of making a small insurance claim - Limerick financial advisor

THIS is a question I’m asked quite frequently and it’s been a while since I covered this area so this week I thought I’d revisit it and give you my thoughts.
So in this weeks’ article I’m going to look at the consequences of making a small claim and uncover the impact it will have on your future premiums.
I’ll tell you about your policy excess and how you can use it to lower premiums and I’ll also tell you about a term called the Average Clause and what it means and how it might affect you.
And finally, if you ever wondered whether your property was over or under insured, I’ll provide you with a source that will tell you exactly what your property, at a minimum, should be insured for.
Okay lets get started.
The reason people are asking me about making a small claim is because the nature of the claim and the financial impact it caused may not be significant but they’re wondering nonetheless should they use their home insurance policy to cover the cost. They don’t really want to raid their savings account to cover the cost of the repairs.

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And what’s the point in having an insurance policy if you’re not going to use it though, right?
But there is that uncertainty about the impact a claim could have on their future premiums.
And if you have that worry it’s well founded because if you have a claims history regardless of how big or small a past claim was it will impact your future insurance premiums. They could end up being higher than they were for up to three or even five years starting from the date the claim was first made.
With that in mind I wanted to find out exactly what the monetary impact this would have on monthly premiums so I contacted a very well-known insurance provider and I asked them to give me some quotes based on insuring a property for €450,000 with contents cover of €50,000 and a policy excess of €250 (this is where the first €250 of any claim is paid by you rather than the insurance company).
The premium they quoted me for the year was €530.95.
I asked them if I made a claim in the last number of years would this influence the premium they’d charged me?
And yes, they said it would.
If I made a claim within the last year the annual premium would increase to €758.50 which is a 43% increase and it would increase to €606.80 if I made a claim within the last two years which is a 14% increase.
If I had made a claim but it was three years ago or older then there would be no impact on the premium, and it would remain at €530.95.
Based on these numbers from a financial perspective I personally don’t believe it’s worth making a claim for anything less than €500.
And knowing this amount is very important because if you now know not to file a claim for less than €500 why would you have a small policy excess on your policy?
If you increased your policy excess from €250 to €500 the insurance provider I was speaking with told me that it’s likely that premiums would reduce by about 4% and if you increased your excess to €1,000 the reduction they told me could be even greater at c. 6%.
So, if you are looking at ways of saving on your annual premium this is one way to do it without having any impact on your core cover.
And if you were to increase your policy excess from say €500 or €1,000 in order to take advantage of lower premiums you should set aside €1,000 of your savings and put them into a Credit Union or An Post account or any account that’s convenient for you where the amount will cover your out of pocket expenses for anything costs incurred up to €1,000.
If you do this four things will happen:
* Your existing premiums will immediately reduce
* You are preserving your no claims history
* You are keeping your new lower premium protected going forward and,
* You have set aside funds that can be used to cover the cost of any accidents or damages that may occur in the future.
In the UK statistics are showing each year that more and more people are doing this and are opting for a higher voluntary excess each year and taking advantage of lower annual premiums.
And people are also not making as many small claims anymore (they are seeing a 10% reduction since 2008) and that’s because people know the impact it will have on their following year’s premiums.

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Now let me ask you a quick question about your own home insurance policy.
And this question is particularly relevant given the time of year when it’s likely that storms will be visiting our shores in the next few months.
And the question is, how much is your house insured for and how did you arrive at the figure?
I will tell you shortly how much you should insure it for, but before I do, many people under insure their property to save on their annual premium and I absolutely get why some people do this, however those that do don’t realise the impact of what they are doing.
If for example a house was insured for €300,000 and a couple wanted to reduce the level of cover to say €200,000 because their monthly premium will subsequently reduce. If anything was to happen to their property that caused let’s say €100,000 worth of damage they might think it not a problem, we still have more than the amount we are going to claim for even after reducing our level of cover – but they are wrong.
There is a thing called the Average Clause in an insurance policy which states that an insurance company will only pay a proportional amount of the actual value of a property.
The effect that this would have on the couple I was just referring to would be that when they made a claim for the €100,000 worth of damage their insurance company would say, the true reinstatement value of their property is €300,000 and they are only insured for €200,000 i.e. two thirds of what it should be insured for we’re only going to pay 67% of any valid claim you make.
Which means the insurance company would only pay them €67,000 if the claim was successful leaving them €33,000 short . And all for what was probably a relatively small monthly saving when they reduced their level of cover.
The insurance company can justify this because why should they take the risk because you choose to under insure the property by paying a premium on an amount less than what the house is valued and expect to be paid out on the full amount you are claiming for?
You can overcome the average clause by doing two things (a) insuring your property and contents for their correct value and (b) making sure your policy states that you are covered for its full replacement value. This may increase your premiums’ but it will fully cover you rather than paying according to the average clause.
What therefore should your house be insured for?
There is an excellent website from the Society of Chartered Surveyors – www.scs.ie – and when you look at this site, inside you’ll find their home rebuilding calculator which shows what the cost of rebuilding a particular property type is throughout the country.
It will show you for example that a 3-bed semi-detached property in Dublin (typical size 98 sq. m) should be insured for €312,620.
The same type property in Cork should be insured for €280,280 and €269,500 if you live in Limerick and €247,744 if you live in the North-West of the country.
It’s a very useful guide and something you can compare your existing cover against. It will confirm that you're insured for the right amount or perhaps you’re over or under insured but at least now you have something to measure and compare against.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie