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Coverage vs Cost: Are You Under-Protected by Your Car Insurance?

It’s been over two years since the car insurance industry in Malaysia was liberalised. Despite this, car insurance premiums have not changed much. From a consumer perspective, you may not feel much or even any change.

But just because car insurance premiums don’t vary a lot from provider to provider, does this mean it makes no difference which provider you choose? Is there no difference between each car insurance plan since the premiums are all relatively similar?

The answer is (obviously) no. It does matter which car insurance plan and provider you choose. The next question is – should cost be the decisive factor when choosing between different plans and coverage options?

Should cost be the primary factor when choosing car insurance?

We live in tough economic times and many of us are struggling to get by.

So, it seems to make sense to put cost at the forefront in your car insurance selection process. It also makes sense from a psychological standpoint.

Consider the typical online renewal scenario – as you click on an add-ons you would like, you see the total amount that you must pay just keep growing larger.

This can be daunting, especially since car insurance premiums are paid on an annual rather than monthly basis. No one likes a sudden big hit to their pockets!

Of course, it is a fact that the higher the coverage, the higher the cost. This can make it seem like they are in direct opposition to each other, which may lead to the apparently logical conclusion of ‘to lower my costs, I have to lower my coverage’.

But is this the correct way to think about car insurance premium costs?

Have you considered the costs of a negative situation?

When talking about insurance, we cannot neglect considering the cost of the negative scenario. After all, that is the whole point of getting insurance in the first place!

The cost of the negative scenario is the cost you would incur should the negative scenario occur. The negative scenario would vary from situation to situation, but in the case of car insurance it would be things like getting into a car crash, getting caught in a flood, or getting your windscreens smashed in.

But how can you evaluate these costs in a systematic way and add them to your overall decision-making process? To do so, you can use a tool known as scenario analysis.

Using scenario analysis to assess appropriate car insurance coverage levels

Let the Bear put on a thinking cap for a moment here. First, let’s define scenario analysis.

According to Wikipedia, scenario analysis is a process of analysing possible future events by considering alternative possible outcomes. Its purpose is to allow improved decision-making by allowing deep consideration of outcomes and their implications.

In the context of car insurance, you can use scenario analysis to give you a more comprehensive picture of the actual trade-offs between costs and coverage. Remember, it’s not just the initial costs (the amount you pay every year) you have to consider.

So, how can you use scenario analysis to make a better decision about your car insurance? Well, that’s what this article is all about. Here’s a simple four-step process you can use.

Step 1: Consider as many possible negative scenarios as possible

When it comes to motor vehicles, the list of possible negative scenarios could be endless. But let’s focus on the most common ones. The question to ask yourself in this step is ‘what are some of the possible negative scenarios that increased insurance coverage could cover?’

Here are four common scenarios to consider:

Scenario 1: Destroyed or damaged windscreens

Most car insurance plans don’t cover your car’s windscreen. And there can be a huge range of things that cause this – anything from collisions to vandalism to falling debris. Don’t forget to consider the types of damage to the windscreen too: chips, cracks, and of course shatters.

Scenario 2: Stolen or damaged aftermarket vehicle accessories

In many cases, petty criminals are more interested in stealing your car’s expensive media player (or even your dash cam) than the car itself.

While theft of the vehicle itself is covered under most car insurance plans, covering theft of accessories requires separate add-ons. Same goes in the event of car accidents; these accessories won’t be covered.

Scenario 3: Flood damage

Floods along with other acts of nature such as earthquakes and hurricanes, are also not covered under standard car insurance plans. Luckily, here in Malaysia, we don’t have to worry about earthquakes or hurricanes. However, floods are unfortunately all too common. Here’s what to do if your car gets flooded, by the way.

Scenario 4: Passenger’s legal liabilities resulting from accidents

If you’re lucky, any car accidents you may be in will be minor. But the reality is, many of them aren’t, and the resulting injuries require serious medical attention.

Furthermore, if there are any passengers in your car, you may be liable for their medical costs too. Most standard policies do not cover passenger liability, meaning you may be sued for damages if your passengers get injured while you are driving.

Step 2: Estimate the cost of negative scenarios

Now that you’ve considered a few possible negative scenarios that might occur, it’s time to look at the potential costs of each one.

How much could each negative scenario cost me? Let’s look at the four scenarios outlined above and estimate the costs of each one

Scenario 1: Destroyed or damaged windscreens

Depending on the model of your vehicle, replacing your windscreen might cost you anywhere from RM600 for a Perodua to over RM5,000 for vehicles with windscreen sensors like a Ford Focus to close to RM10,000 if you drive a luxury vehicle.

How much does yours cost? You can get an estimate of windscreen replacement costs here.

Scenario 2: Stolen or damaged aftermarket vehicle accessories

Car audio systems and other aftermarket accessories today are more advanced than ever.

A quick perusal of some local car audio accessory websites show that a basic unit can cost over RM400 while more premium units can easily reach thousands of Ringgit. And we haven’t even looked at adding those fancy neon lights or your video recorder yet!

Scenario 3: Flood damage

Depending on how lucky or unlucky you are, if your car gets caught in a flood, the damage can range from relatively minor to almost a total loss.

According to one car workshop owner, if the engine control unit (ECU) is undamaged then repairs could be in the RM1,000 range. But if the ECU is damaged, then replacing it with a used model could cost RM7,000 for the average car to RM30,000 or more for a luxury model.

Scenario 4: Passenger’s legal liabilities resulting from accidents

Fortunately, here in Malaysia, citizens have access to the public healthcare system for a nominal fee. Yet, for reasons including shorter wait times and higher quality care, most people would prefer the private system if they could. This costs money, and if the victims don’t have separate medical insurance, they may decide to try and hold you liable for it.

Step 3: Estimate the probabilities of the negative scenarios occurring

The next step is to add some probabilities to our scenario analysis. The question to ask yourself is ‘what are the chances of these negative scenarios occurring?’. Now, keep in mind that these can never be objective, only subjective. Hence, they are only estimations.

When estimating these probabilities, you have to keep in mind the natural human tendency to discount the probability of something bad happening to them.

This is colloquially known as the ‘it could never happen to me’ bias. Sounds familiar? But for a more accurate picture, we should do our best to ignore this bias. It’s not as easy as it sounds, but we can look at actual statistics for help.

Traffic Accident Statistics

Getting into a road accident could be the cause of several of the negative scenarios outlined above. It could lead to a destroyed windscreen and media player or medical costs for both you and your passengers. These are all highly plausible.

So, what are the road accident statistics in Malaysia?

In 2018, there were almost 550,000 road accidents in Malaysia, an almost 3% increase from 2017. With about 28 million registered vehicles in Malaysia, that equates to a one in 50 chance of getting into an accident. And that’s on a per year basis (not lifetime), meaning each year you have a one in fifty chance of getting into an accident. It’s almost a matter of when, not if.

Have you ever used your mobile phone while driving? If you’re being honest, you probably have. And you’d be far from alone. According to a study by the Malaysian Institute of Road Safety Research, 44% of Malaysian drivers admit to using their mobile phone while driving.

Flood statistics

Unfortunately, there are no official flood statistics in Malaysia. So, let’s look at the anecdotal evidence instead – and there’s plenty of that.

There was a flash flood in that submerged hundreds of vehicles in a city parking lot. Another flash flood stranded over a hundred vehicles in Kuala Lumpur.

Simply put, flash floods are a fact of life here in Malaysia, whether it happens to us or not.

Step 4: Compare estimated costs and probabilities with the cost of additional coverage to determine appropriate coverage levels

The final step is to compare the results of the steps above the cost of mitigating the negative scenarios i.e. the cost of higher insurance coverage.

Let’s look at the four negative scenarios again and assess the costs of mitigation.

One thing to keep in mind is that if you’re a safe driver you can use the savings from your No Claims Discount (which can reach a maximum of 55%) to get higher coverage for yourself.

As car insurers like AXA and Zurich implement risk-based premiums assessment, your base premiums (even before NCD) will already be lower especially if you are from a low-risk demographic.

Scenario 1: Destroyed windscreens

Adding windscreen coverage to your car insurance plan typically costs around 15% of the insured sum (of the windscreen not the whole car). So, if it was insured for RM1,500, you would pay an additional RM225 on your annual premium.

It offers a far better deal than paying the whole RM1,500 yourself in the event of any damage.

Scenario 2: Stolen or damaged aftermarket vehicle accessories

Car accessories are generally charged the same way as additional windscreen cover – 15% of the insured sum. You decide how much you want to insure your accessories for.

Scenario 3: Flood damage

Additional flood insurance coverage will typically cost you 0.5% of the total insured sum of your vehicle. So, if the sum insured was RM50,000, then flood coverage would cost you an additional RM250. Considering the amount of damage floods can cause your vehicle, 0.5% almost seems like a paltry sum.

Some car insurance providers go below the typical market rate. For instance, both Zurich Z-Driver and AXA SmartDrive allows charges 0.2% on the full sum insured.

You can also opt for limited flood coverage of 25% of the total sum insured for AXA SmartDrive, which will cost you 0.1% of the total sum insured on your vehicle.

Scenario 4: Passenger’s legal liabilities resulting from accidents

There are a few types of add-on coverages you can opt for here.

There’s coverage for legal liability to passengers, which is coverage for passengers attempting to hold you liable for any injury to them.

There’s also coverage for legal liability of passengers, which is coverage if a third-party brings legal action against your passengers e.g. if they open a door and knock down a motorcyclist.

Final Word

Get a more holistic picture of coverage against cost before making a decision.

The problem with most of us is that we only see what is right in front of our eyes. In this case, this would be the ever-increasing price on our screen as we click on each add-on. But that doesn’t give us the whole picture.

To get that whole picture, you must also consider the cost of negative scenarios and the probability of them occurring. Only then will you be able to make a more informed decision as to the right level of coverage for you.

Here at Finder, we are committed to helping you make more informed decisions when it comes to travel insurance, credit cards, deposit accounts, and loans. If you found this article helpful, please give it a share!

Don’t wait for your car insurance (and road tax) to lapse. You can renew it as early as 60 days before expiry!

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