New short-term insurer Naked challenges the insurance status quo.

When it comes to car insurance, ideally you want to be fully insured so that your own car is covered in an accident or theft, but that doesn’t mean you have to pay the highest premium in the market. Car insurance has become a highly commoditised product and for the average car owner, insurance is all about price ‒ as long as you are comparing like with like.

Naked Insurance is a new, app-based insurer in the market started by three individuals who used to work as insurance actuaries, so they know how insurance is priced and where insurance is overpriced.

According to co-founder Ernest North, in order to attract new customers, insurers will run a loss in the first year or two, but then the premium increases start to make profits in year three. “This means by year three you are probably overpaying for insurance, so it is worth asking for a reduction in your premium.” As it is far cheaper for an insurer to hold onto an existing customer than to acquire a new one, invariably the insurer will reduce the premium increase, even to zero.

The problem is that there is a hassle factor when it comes to reviewing your insurance each year, and insurers rely on that inertia to keep increasing premiums. North says that although South Africa has comparison sites, these are not independent and do not provide a true reflection of the range of insurance products in the market.

“In the UK everyone uses comparison sites, so prices have been driven down and there is virtually no price difference. Consumers now choose on brand, service and convenience because everyone knows the right price they should be paying.” North says that Naked Insurance aims to always charge the right price. “If you want to cancel your policy, we won’t come back with a counter offer because we know that your premium was fair and we were not overcharging.”

Naked benefits from being a purely digitised insurer with very little overheads and should therefore be able to provide a competitive environment. North says the company also wanted to approach insurance with an attitude that your claim will be paid, rather than finding ways not to pay.

“The insurance industry is designed to minimise claims or find legal ways not to pay because profits depend on the claims ratio,” explains North. Naked has been structured so that it pays the underwriter (Hollard) a fixed percentage of the premium rather than on the claims ratio. This means neither Naked nor Hollard can make more money by not paying claims. North adds that if the portfolio as a whole makes a profit, the surplus is paid to charities nominated by the clients. “This reinforces Naked’s independence when evaluating claims.”

Naked Insurance also has an interesting feature which allows you to reduce the cost of your cover further if you do not drive the car every day. If you are going away and leaving your car idle for a few days, you simply press the “CoverPause” option on your app and your premium will drop for that month.

Putting Naked to the test

Naked works on an app-based system which claims you can insure within 90 seconds. Once you have accepted the quote you enter your credit card details and you are covered. So, we put the app to the test.

The app was very easy to use, and we could play around with the answers to understand what impacted on the premiums. For example, we made sure that we selected the same excess as our existing insurance cover which is R3 000.

It was also interesting to see the impact claims have on the final quote. One car had been involved in an accident less than two years ago and that increased the monthly premium by over R200 compared to if we had select ‘no claim’.

In terms of comparisons, when we compared our two household cars to our current insurer the quote was not any cheaper. We do have our household contents with the insurer which apparently reduces the car insurance costs as household insurance is very profitable for insurers.

Social media feedback on claims paid by Naked has been positive, as has been the experience of using the CoverPause feature which allows you to switch your cover on and off at the press of a button.

The drawback is that you do require a smart phone in order to access the app and currently the CoverPause option is only available on an iPhone due to technical issues. However, North says this should be resolved within the next few weeks and that in the meantime Android users can pause cover by sending an email.

Points to note about your premium

• Your premium is influenced by several factors, including years of driving experience, age, car value/model, credit score and area. For example, a 46-year-old with a very good credit record driving a 2012 Toyota Corolla valued at R160 700 will pay around R392 per month for comprehensive cover with a R5 000 excess. On the other hand, a 25-year old with a good credit record driving a 2013 Polo Vivo 1.4 Trendline valued at R120 100 would pay R573 per month with an excess of R5 000.
• If you are in your 20s you should review your insurance cover every year because each additional year that you have a driver’s license, your risk premium drops significantly.
• Once you reach the age of 45 years old, your risk premium stabilizes so you are less likely to get a bigger discount unless your premium increases were above average.
• Your credit rating affects your premium, so if your credit rating has improved then your insurance premium should decrease.
• If you have not made a claim in two years, your risk premium will be reduced. So, if you have been risk rated due to an accident in the last 24 months, once the period is passed, review your premium

This article first appeared in City Press.