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SIMON BROWN: I’m chatting with Ernest North, co-founder of Naked. Ernest, I appreciate the time today. Insurance I think for many people is one of those grudge payments until of course you need it – in which case you’re very glad you’ve got it. Car assurance in particular. A lot of folks ask why you need it. I always have it because frankly I’m worried about either crashing into a Lamborghini or, worse, if you owe money to the bank and you crash the uninsured car you’re in you’re in serious financial trouble.
ERNEST NORTH: Exactly. Thanks for having me, Simon. Like you say, in these tough financial times people are increasingly and rightfully asking questions about their budget and where they can cut. Car insurance is something that doesn’t feel like you’re getting an immediate return for the money you’re paying every month. But it’s one of those things where the risk of being without it is simply too great. We see a lot of people unfortunately at the moment taking the risk of driving without car insurance.
At a practical level that’s risky, because if your own car is damaged or written off or stolen, that’s going to leave you in a difficult position. But even more scary is the reality that as a driver on the road if you are deemed to be at fault, even partially, then the other party or their insurer can sue you. Taking the financial [risk] of driving into a very expensive car and then having to pay off the damage on that car for many, many years to come is simply not responsible. And so it’s unfortunate to see how many South Africans are struggling to make those payments; but it’s not something that you can afford [not] to do.
SIMON BROWN: There are cars out there that are worth most people’s net worth and are driving around. I give them a wide berth for that exact reason, and I even have insurance.
If we are looking to cut our insurance costs we take the view that, okay, car insurance, we need it, we can’t do without it, there are good reasons for it. [As for] cunning ways we can reduce it, one I’ve always thought about is perhaps increasing my excess, now making sure I can carry that increased excess. But does that help?
ERNEST NORTH: Absolutely. One of the exciting things of doing insurance digitally is your ability to play around with the numbers and to see how your premium changes as you pick different levels of excess. So an insurance app where that functionality is available, clicking the button to see if I increase my excess to R10 000 or maybe even R15 000, very often that has a significant effect on reducing the premium. Of course, like you say, make sure that you have a Plan B for how you would be able to have that money available easily. But certainly something that we are seeing more and more people doing is choosing a higher excess.
But of course the number one tip for saving money is just to shop around regularly and to make sure that you’re not being overcharged wherever you are at the moment. Doing a quote online is simply the best way of doing that.
SIMON BROWN: That’s a good point, and it has become that much easier to do. I can remember my first car – in the early nineties, I think, maybe around there – and insurance was truthfully painful. So I just went to my mother’s broker and insured with them and kind of let it be. These days we really can get a bunch of quotes in double-quick time.
ERNEST NORTH: It’s the process of insuring initially that is unfortunately very often painful and was more so in the past. But there’s also the question of when an insurer reviews your premiums every six or 12 months – how many of us have the discipline to then go and check whether that premium is still the right one? Unfortunately, the business model of many insurers is one that relies on consumer apathy, one that relies on consumers not taking action. And so as consumers we have to be disciplined.
But increasingly it’s getting easier to do it online and to simply check how you can get a final price online, and how that compares with what you’re being charged in your current arrangement.
SIMON BROWN: What about bundling cover? We are talking about a car here, but what if I bundled my laptop in, and maybe my household as well. In other words, take my business to the insurance company. That would make me a better client and get a better price?
ERNEST NORTH: That’s a very interesting question and quite a contentious one in the insurance industry, because many insurers have successfully grown a lot by using this tactic. A question that we at Naked ask, having worked in the industry for many years – and there were two sort of fundamental flaws with this – is [whether] consumers don’t know which part of the risk they are supposed to be charged what for? They only worry about the total amount.
Even though very often an insurer can say, ‘We gave you a discount because you added the other item,’ very often that discount was just made up by making one of the other items more expensive, and you didn’t know about it. And so the related concern I had with that when we started Naked was: if I now sell my house, did that [discount] really change the risk on me as a car insurance driver? Technically it didn’t.
And so what we wanted to do at Naked was to say we are going to charge you the right price for each individual item. And if you then cancel one of the other items, that shouldn’t change your price; you should have stability.
And so I’m certainly recommending that for some people it will be more affordable to find insurers that have this system as a product that is fairly vanilla and can be bought and sold very quickly.
We have found that more consumers have value in being able to find the best price for each individual item, especially because they can do so digitally.
SIMON BROWN: I’ve got you. And it’s so much easier these days. Again, I don’t have to make a hundred phone calls. I can get online and insure separately. I take your point; my risk shouldn’t change just because I’ve given you some extra business.
A quick last question. Cars that are at risk of being stolen, hijacked, etc – there’s often a sense that they have a premium. But in the note you put out you said not really, because truthfully it doesn’t happen that often.
ERNEST NORTH: It is worth saying that I’m not rejecting the obvious thing which we’re seeing in the market, which is that there are some makes and some models – especially in certain provinces like Gauteng – that are more at risk. There are definitely some makes and models that are being stolen significantly more than they were three, four, five years ago.
What I would say, though, is when you’re paying for insurance, the vast majority of what you’re paying for is accidents. A very small percentage of your insurance premium is to cover thefts or hijackings. And so what I’m proposing is that people remember that when you’re deciding which car you’re going to buy, go through the process of understanding what it is going to cost you to own that car, and especially what it’s going to cost you to insure that car. Very often people will find that the theft and hijack risk is not that significant and that the insurance premium on model A is not that much higher than the insurance premium on model B, because in reality both of them are significantly exposed to accidents. And that’s the bulk of what makes up your insurance premium.
SIMON BROWN: I take the point. I’m way more likely to crash my car than to have it stolen.
We’ll leave it there. Ernest North, co-founder of Naked, I appreciate the time today.
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