What is insurance and how does it work?
Insurance can seem complex and full of jargon, and we are often asked how it all works.

1

Insurance premiums

Insurance premiums are the amount a customer pays for their insurance. Each customer’s premium gets paid into a pool of money from which all claims are paid.

Insurance companies statistically predict the number of claims they expect to pay out each year. As a general car, home and contents insurer, AA Insurance covers a significant number of assets in New Zealand so our sample size is very large, which helps us predict claim numbers. We are good at predicting the number of claims we might receive in a year, as well as any given month. Once we’ve worked out the number of claims we’re expecting to receive, we can predict the cost of those claims we need to pay out, and how much premiums will be for customers.

From there, we can determine how premiums are allocated between customers. Some people are more likely to make a claim than others, so are considered to be a greater risk. Premiums are calculated accordingly, so some customers will pay more for their insurance than others. For example this is where age, gender, driving experience, and style of car, amongst other things, play a part in car insurance.

2

Why we need insurance

People need insurance for a number of reasons, but mainly because they want protection in the event something unexpected happens. The protection offered by our home, contents and vehicle policies can cover the replacement or repair of our customers’ belongings that they may not be able to afford themselves e.g. a kitchen fire, or the cost of the damage caused by others’ actions, such as rear-ending another vehicle. Without insurance people would need to pay for the damage themselves. They can manage the risk of loss or damage to their property by purchasing insurance, and let the experts take care of everything in exchange for an insurance premium.

3

Is there a shoebox of money with my name on it, waiting for me to make a claim?

It’s a common assumption that the money a customer pays for their premium is ‘kept aside in a separate box’ for when they make a claim. In reality, this money is pooled with all the other premiums and goes to pay off other peoples’ claims and cover the other costs of running the business. One in three of our customers made a claim last year, which was paid out of the pool of money. On average, a customer makes a claim on their insurance once every eight years.

The most common claims for vehicles include collisions or theft. For contents claims it generally involves lost or accidentally damaged hearing aids, dentures, reading glasses and mobile phones, while home claims most often involve damage caused by fire, electrical incidents and weather.

4

Who insures the insurers?

Reinsurers are the companies that insure the insurance companies. There are also companies that insure the reinsurers. Most are based overseas.

Each year we expect to receive a certain number of sizable claims and plan accordingly. This is the norm and our calculations help predict this. However, reinsurance protects against things that aren’t the norm, such as earthquakes and floods that are infrequent yet can be huge in terms of financial cost.

5

Insurance levies

In addition to your insurance premium, you will notice that there are several levies such as those for EQC, the Fire Service and GST included in your invoice. They are additional to your insurance premium and your insurer is legally required to collect these amounts from you on behalf of government agencies.

It’s worth noting that your insurer does not insure your land. Unlike other countries, residential land in New Zealand is covered by the Earthquake Commission, for occurrences such as landslips, and earthquakes. The EQC provides cover for the land on which your home is built, as well as a portion of the cost of your home.

If you have contents insurance, the EQC also provides cover for a portion of your contents.

The EQC provides cover up to $100,000 (+ GST) for your home, cover for your insured residential land up to an 8m perimeter around your home, and up to $20,000 (+ GST) for your contents.

This is only a very brief summary of how EQC cover works. Further information is available on the EQC website.

6

How can I reduce my insurance premium?

For all policies, an easy way to reduce the cost of your insurance is to choose a higher excess in return for a lower premium. Remember, you will only need to pay your excess if you make a claim. Also, there are a number of ways you can reduce your car insurance premium with us. If you have a Comprehensive policy you could choose to exclude optional benefits, such as Rental Cover or Excess-Free Glass Cover, in exchange for a lower premium.

7

Why do I have to pay an excess?

An excess is the amount you must pay towards a claim for each event that occurs and is covered by your policy. You would have had a choice of the excess you would like to pay at the time you took out your policy. The amount of excess you choose for your policy is a way to help lower your premium - the higher your excess, the cheaper your premium.

The full text for a thorough explanation of the details of the insurance is taken from AA insurance

 

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