Finance · Topic 19 of 19
Insurance
Theory
Insurance products provide a form of financial protection against unexpected costs. By paying a fee called a premium, you transfer the financial risk of a specific event (like a car crash or a broken phone) to an insurance company, who will cover the loss if it occurs.
1. Core Terminology
- Premium: The money you pay to the insurer, either as a one-off purchase or in regular monthly instalments.
- Claim: A formal request to the insurance company asking them to pay for a loss.
- Exclusions: Specific events or circumstances that the policy will not cover (e.g., intentional damage to a laptop, or extreme sports on a travel policy).
2. The Excess (A Major Exam Warning)
An excess is a mandatory minimum amount that the customer must pay towards the cost of a claim before the insurance company pays the remainder.
Common Examiner Trap:
A very common error is to describe an excess as a “pot of money” that can be used to repair an item. You must never describe it this way; it is your own money that you must hand over when you make a claim!
Balancing Risk: Choosing a policy with a higher excess reduces the financial risk for the insurance company. Therefore, a higher excess will generally result in a lower premium for the customer.
3. The Impact of Making a Claim
- If you make a claim, the insurance company will view you as a higher risk individual. As a result, they will usually increase your future premiums for subsequent years.
- You may also lose any accumulated no-claims bonuses (a reward discount given for every year you do not make a claim).
Exam Wording:
When answering written questions about why someone might not make a claim, you must specifically state that it would increase their future premiums; do not just say it will increase their "monthly premium".
Worked examples
Example 1
Example 1: The Mathematics of Claiming
Liam has mobile phone insurance with a compulsory excess of £150. He drops his phone and shatters the screen. A local repair shop quotes him £185 to fix the screen.
Determine whether Liam should make a claim on his insurance or pay the repair shop directly. Justify your answer with a calculation.
If Liam claims, he must pay the £150 excess, and the insurance will pay the remaining £35.
If he doesn't claim, he pays the full £185. However, claiming will likely increase his future premiums and cost him his no-claims bonus.
Conclusion:
Because the financial benefit of the claim is so small (), Liam should pay the repair shop directly. The £35 saved by claiming is likely to be wiped out by the increase in his future insurance premiums.
Example 2
Example 2: Comparing Policies (Exam Style)
Esme needs new building insurance. She is choosing between the following two options:
| Cost per year (£) | Total excess (£) | |
|---|---|---|
| Option A | 216.94 | 350 |
| Option B | 281.95 | 100 |
State one advantage of having a high excess amount on your insurance policy, as seen in Option A.
A high excess amount reduces the risk for the insurer, which results in a lower annual premium (cost per year) for the customer.
Example 3
Example 3: To Claim or Not to Claim?
Deirdre has a van insurance policy with a £195 excess for accidental damage. Her van door is scratched in a minor accident. A local garage has quoted her £210 to repair the damage.
Give one reason why Deirdre might choose not to make a claim on her insurance.
Deirdre might choose not to claim because making a claim would likely increase her future premiums or cause her to lose her no-claims bonus.
(Note: Stating "she only saves £15 after paying the excess" would also be a valid mathematical reason!)