Insurance to Get More Costly: Here's What You Need to Know

If you've been keeping an eye on financial news, you may have heard about the changes brought about by the Finance Act of 2023. Among these changes is a new sub-section to section 17 of the VAT Act, which could affect your insurance premiums. But what does this mean for you and your coverage?

Let's break it down.

This new regulation means that if you suffer a loss covered by your insurance policy and make a claim, you'll now need to pay 16% VAT on the compensation received. This introduces a new financial burden that wasn't there before.

The introduction of the 16% VAT creates a gap between the expected compensation amount and the current sums insured. The sum insured refers to the maximum amount an insurance company will pay out for a covered loss. With the addition of VAT, policyholders will need to revise their sums insured accordingly to ensure they receive adequate compensation in the event of a claim.

To illustrate this, consider a business person who has insured their boutique for Ksh1,000,000. Under the new VAT regulation, if they were to claim their insurance coverage, they would need to remit Ksh160,000 to the Kenya Revenue Authority (KRA) as VAT. This means that, effectively, they'll receive less money than what they are insured for, leaving them with a shortfall in covering their losses.

The disparity between the sum insured and the compensation received after VAT highlights the need for policyholders to increase their sums insured. Only by aligning the value of insured assets with the compensation you expect to receive can you ensure you have sufficient coverage to get back on your feet in case of a loss.

To ensure that you're adequately covered and won't be left in the lurch if you need to make a claim, you may need to increase your sums insured. However, revising your sums insured may increase your premiums. 

For instance, for the business person mentioned earlier, their sum insured will need to increase to Ksh1,160,000 to accommodate the VAT element. With this increase, their annual premiums will also go up.

This change will affect various types of insurance, including general insurance classes such as marine, domestic and industrial fire, private motor vehicle, aviation, and workers's compensation. To prepare for the extra charges, you should review your insurance policies, assess your insured sums, consult your insurance provider, and adjust accordingly.

Read Also: Why You Should Have Insurance As a Young Adult

Factors That Affect Your Insurance Premium

Increases in the sum insured, such as those necessitated by new VAT regulations, can directly impact premiums. For instance, if you need to raise your sum insured by 16% due to VAT deductions, your premiums will likely rise proportionately. This adjustment ensures that your coverage adequately reflects the increased costs associated with VAT.

Beyond the sum insured, insurance companies consider various factors when determining premiums. The type of coverage you choose plays a significant role. Comprehensive coverage, which protects against a broader range of risks, typically commands higher premiums than basic policies. For instance, comprehensive car insurance can be 5% to 7% of the car's value, while third-party insurance coverage typically costs less than Ksh10,000. 

Your occupation, income, and lifestyle are also influential factors. High-risk occupations or lifestyles prone to accidents or health issues may lead to higher premiums due to an increased likelihood of claims. Similarly, a history of frequent claims can raise premiums as it indicates a higher risk to insurers.

Coverage options and deductibles also impact premiums by affecting your financial responsibility level. Opting for lower deductibles or additional coverage features can increase premiums, while higher deductibles or limited coverage options may lower them.

Your location is another crucial determinant. Areas prone to natural disasters, high crime rates, or expensive healthcare services often face higher premiums to offset increased risk and potential costs for insurers.

Read Also: TIA Switch: Are You Paying Too Much for Car Insurance?

Ways to Lower Your Insurance Premiums

Increasing premiums due to the new VAT regulations means you may have to allocate more of your budget toward insurance costs. This can strain finances, especially if you or your businesses already operate on tight budgets. While you may choose to lower your insured sums, this can lead to underinsurance, which occurs when the coverage amount is insufficient to cover the cost of a claim fully. 

Insurance can be a lifesaver, but higher premiums can be a financial burden. Here are four things you can do to ensure you are well-insured without breaking the bank. 

1. Shop Around and Compare Costs 

Insurance premiums can vary significantly between companies for the same level of coverage, so exploring your options is crucial. You can use online comparison tools to find affordable coverage, get quotes from different insurance providers, or work directly with independent insurance agents/firms to find the right coverage for your needs and pockets. 

When comparing costs, consider not only the premium but also the coverage limits, deductibles, and any additional benefits or discounts each insurer offers. Finally, watch for promotional offers, loyalty discounts, or other incentives that may further reduce your premiums. 

2. Bundle Your Insurance Policies 

Bundling your insurance policies involves combining your home, life, health, and auto insurance with the same provider. Consolidating your insurance policies with one provider can save you money and simplify the management of your coverage. 

Many insurers offer significant discounts for bundling multiple policies together. Consider contacting your current insurance provider or explore options with new insurers. Provide details about the types of coverage you need and inquire about available bundling discounts. Be sure to compare the bundled premium with the combined costs of individual policies to ensure you're truly getting a discount.

3. Increase Deductibles 

Deductibles refer to the amount you're responsible for paying out of pocket before your insurance coverage kicks in. When you opt for a higher deductible, you take on more risk; insurance companies can reward you with lower premiums. This is because the insurance company may be liable for a smaller portion of the potential claim payout.

As you increase your deductible, the sum insured may decrease to reflect the reduced coverage amount. This can leave you vulnerable to financial loss if an insured event occurs that exceeds your coverage limits. It's essential to assess your risk tolerance carefully and maintain adequate coverage for potential losses.

Therefore, before adjusting your deductibles, evaluate your finances to determine an appropriate deductible level you can comfortably afford in case of a claim. Since you'll need to pay more upfront for a covered loss, you may have to keep substantial emergency funds.  

4. Review Your Insurance Needs Regularly and Eliminate Unnecessary Coverage

While having more coverage is always beneficial, overinsurance can lead to higher premiums. Regularly reviewing your insurance needs allows you to identify policy add-ons your insurer hid in your plan or redundancies and adjust accordingly to avoid overinsurance. Eliminating unnecessary coverage helps streamline your policies and reduce premiums without compromising on essential protections. 

Start by reviewing your insurance policies in detail, including coverage limits, deductibles, and exclusions. Assess whether your current coverage aligns with your changing needs, lifestyle, and financial situation, then eliminate the unnecessary ones. However, be mindful of coverage gaps that may arise from removing certain protections and consider adjusting your remaining coverage to mitigate any risks.

Read Also: Break-ins and Broken Glass: Why Home Insurance Was a Lifesaver 

WRAPPING UP

When faced with higher insurance premiums that strain your budget, it's essential to proactively address the situation to ensure that the increased financial burden doesn't compromise your well-being. Speaking with your insurance provider and seeking professional advice can be crucial steps in effectively managing this challenge. 

They'll help you understand the various policy options available to you. Additionally, they may offer insights into cost-saving measures or risk mitigation strategies that can help reduce premiums without compromising on protection.