‘Excess’: More to pay, not more to receive

When you read your insurance policy, if you read it, you may come across a term called ‘excess’. Usually, it says ‘excess on this policy is ₹1,000’ or something like that.

And no, it does not mean the insurance company is going to give you something extra.

It means the exact opposite, that you will pay something. In this case, the first ₹1,000 of each claim in this policy. The insurance company starts paying only after you have picked up your share.

Some policies have a compulsory excess. You can also opt for a voluntary excess which will be over and above any compulsory excess.

Why ever would you opt for bearing part of your own claim? Because of the small silver lining that you get a premium discount for it.

And we all love discounts, remember?

The general insurance industry is reportedly considering imposing a compulsory co-payment of 10% of the claim amount on all new hospitalisation policies from the new year in lieu of a lower premium.

‘Deductible’

An excess is also called a ‘deductible’. A close cousin is ‘co-payment’ which denotes that you bear a percentage of the claim rather than a flat sum.

The principle behind all this is risk-sharing. You have heard of profit-sharing; this is loss-sharing. You retain a small part of the risk and the insurance company takes on the rest.

An excess discourages small claims that can cost an insurance company disproportionately in administrative time, paperwork and money. If repairing that scratch on your car costs around your deductible amount, you won’t claim. You will choose cost-effective hospital treatment options because you are going to bear part of it.

But should you opt for a voluntary excess? Suppose a ₹2,500 voluntary excess on your car means a ₹750 discount on the Own Damage premium and you have no claim that year, then you are ₹750 ahead. If you have a claim that crosses ₹750, that saving has disappeared. You could end up bearing up to ₹2,500 to save ₹750. So, it’s a view for you to take.

Dissect the discount

You will come across excesses in many personal insurance policies. Motor Own Damage policies have a regulator mandated deductible on every claim, with no premium discount for it. Health policies can have deductibles and co-payments. Travel policies frequently have excesses too. Home insurance has them in some covers and add-ons. The idea remains the same: a specified first part of the loss stays with you.

A spin-off series!

And then there is an insurance product built around the idea of excess.

A hospitalisation top-up policy has a pre-agreed deductible called a threshold. If it is set at ₹10 lakh, the top-up responds only after your bills are more than that.

The expenses up to ₹10 lakh should be met by your basic hospitalisation policy or from your pocket. That is also why top-ups can offer large sums insured at relatively attractive premiums. The insurer is not paying from rupee one and smaller claims are more likely and more frequent. So, when your policy says ‘excess’, don’t get carried away by the English. In insurance, ‘excess’ is one thing you are not getting more of.

(The writer is a business journalist specialising in insurance & corporate history)