Introduction
Excess is a term used predominantly in non-US insurance contexts to describe an amount that the policyholder must pay out-of-pocket before the insurer pays for a claim. It is comparable to the concept of a deductible in US insurance. This article delves into the historical context, types, key events, detailed explanations, mathematical models, importance, applicability, and comparisons with deductibles. Additionally, it includes examples, related terms, and frequently asked questions.
Historical Context
The term “excess” has been used in insurance for many years, particularly in the UK, Australia, and other non-US regions. It evolved as a way for insurers to manage risk and discourage frivolous claims by ensuring that policyholders have a stake in the initial cost of a loss.
Types of Excess
- Compulsory Excess: A mandatory amount that must be paid by the policyholder, set by the insurer.
- Voluntary Excess: An additional amount chosen by the policyholder to reduce the premium.
Key Events
- 19th Century: Introduction of excess in early insurance policies to mitigate risk and improve claims handling.
- 20th Century: Standardization of excess in various forms of insurance such as auto, health, and property insurance across different countries.
- 21st Century: Increased flexibility in policy customization allowing greater control over excess amounts.
Detailed Explanations
Mathematical Model
The role of excess can be illustrated with the following model:
For instance, if the claim amount is $2,000 and the excess is $500, the insurer will pay:
Chart: Comparison of Excess and Deductible
pie
title Comparison of Excess and Deductible
"Excess (Non-US)": 50
"Deductible (US)": 50
Importance and Applicability
- Risk Mitigation: Excess helps in mitigating the risk for insurers by transferring a portion of the loss to the insured.
- Lower Premiums: Choosing a higher voluntary excess can lead to lower premiums.
- Discourages Minor Claims: Excess discourages policyholders from making small claims that can be costly for insurers to process.
Examples
- Auto Insurance: If a policyholder has an accident causing $2,500 in damages and the excess is $300, they pay $300, and the insurer covers the remaining $2,200.
- Health Insurance: A policyholder incurs $1,000 in medical expenses with a $200 excess; they pay the first $200, and the insurer covers the remaining $800.
Considerations
- Affordability: Ensure the excess amount is affordable in the event of a claim.
- Coverage Needs: Balance between a higher excess for lower premiums and the level of coverage required.
Related Terms
- Deductible: The amount paid out-of-pocket by the policyholder in US insurance.
- Premium: The amount paid regularly to maintain insurance coverage.
- Claim: A request made to an insurer for payment based on the terms of the policy.
- Policyholder: The individual or entity owning the insurance policy.
- Insurer: The insurance company providing coverage.
Comparisons
- Excess vs. Deductible: While both terms involve an out-of-pocket expense before insurance coverage kicks in, “excess” is used primarily in non-US contexts, whereas “deductible” is used in the US.
Interesting Facts
- Origins: The concept of excess can be traced back to early marine insurance policies where shipowners had to bear part of the cost of damages.
- Customization: Modern policies allow policyholders to choose different levels of voluntary excess, tailoring premiums and coverage to individual needs.
Inspirational Stories
Consider Jane, who chose a higher voluntary excess on her auto insurance to save on monthly premiums. This decision allowed her to afford better comprehensive coverage that proved invaluable when she encountered significant damage from an unexpected storm.
Famous Quotes
“Insurance is not about protection from risk; it’s about understanding it.” – Unknown
Proverbs and Clichés
- “An ounce of prevention is worth a pound of cure.”
Expressions, Jargon, and Slang
- “Going Excess”: Opting for a higher excess to reduce insurance premiums.
FAQs
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What is the difference between excess and deductible? Excess is primarily used in non-US insurance, while deductible is used in the US. Both refer to the out-of-pocket amount paid before insurance kicks in.
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Can I choose my excess amount? Yes, many insurers offer the option to select a voluntary excess amount in addition to the compulsory excess.
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How does excess affect my insurance premium? Generally, a higher excess will result in a lower premium, and vice versa.
References
- Insurance Information Institute: www.iii.org
- UK Financial Conduct Authority: www.fca.org.uk
- Australian Securities and Investments Commission: www.asic.gov.au
Summary
In summary, excess is a crucial term in insurance, serving as a risk-sharing mechanism between the insurer and the insured. Understanding its implications can help policyholders make informed decisions about their coverage, ensuring they strike a balance between affordable premiums and adequate protection. The concept of excess, much like deductibles in the US, plays a pivotal role in the functionality and sustainability of insurance systems worldwide.
