The Hidden Dangers of Under-Insurance

What is under-insurance?

In insurance language, under-insurance is a situation where the insured value is lower than the true value of the insured asset such as your car and your home at the time of purchase of insurance. This sounds difficult, but it isn’t and we will present some examples for better understanding.

For instance, under-insurance for a car could mean that you buy insurance cover for the value (Sum Insured) of a Perodua Myvi, although you are driving a BMW. This is financially dangerous, because in case of an accident or theft, you might think that you get paid as much as the Perodua Myvi, but in reality, you will get even less. Below some more specific examples on how under-insurance can hurt you.

What does under-insurance mean in Motor Insurance?

1) In the case of a stolen car

Chong owns a car that at the time of insurance renewal has a market value of RM 50,000. Because he wants to lower his premium cost, he insures the car at RM 30,000. Unfortunately for Chong, his car was stolen soon after. It is obvious that he would not be able to claim for the market value of his car i.e. RM 50,000, because he never insured for that. So there is already a big loss in amount here between the insured value and actual value.

So Chong will only get to claim RM 20,000. Ouch! Do not make that mistake. Insurance is there to protect you, don’t under-insure to save money.

Cheaper does not necessarily mean better!

What’s scary is that many Malaysians are not even aware that they are under-insuring their vehicles. It is a bad practice by some agents in Malaysia who intentionally under-insure you, so that they can offer you the cheapest insurance. You might be happy that it is cheaper, but when you have the accident or theft you feel cheated. This is why we like to remind our readers again and again the importance of having the right insurance agent who has your best interest.

2) In the case of damage

Siti’s new car has a market value of RM 80,000, she too tries to save a little money and under-insures her car at RM 60,000. 8 months later she met with an accident and had to claim from her comprehensive policy. The amount needed to cover for the damage was RM 10,000. And at the time of the claim, the market value of the car was RM 75,000.

Similar to the example above, because Siti under-insured her car “average clause” applies. Siti will only be getting a pay-out of RM 8,000 instead of the actual loss of RM 10,000. There is a shortfall of RM 2,000 which Siti will need to fork up with her own pocket money.

What does under-insurance mean in property insurance?

The same principle applies, along with the “average clause”. However, the difference in the value of a house and a car can be significant, therefore the financial impact on you can be huge when there is a shortfall. A simple example below:

You insured your home for RM 600,000, when the re-build cost from scratch is RM 900,000. Note:  When you set the sum insured for your house, you look at the re-building cost only and not at the full value of your property, which is house + land. A fire broke out and damaged your home one morning. The repair and replacement (of possessions) cost comes up to RM 300,000. The claims settlement would be as follows:

But what happens when at the time of the claim, the re-building cost of the house has increased to RM 1,000,000? We would be looking at a smaller pay-out then! Over time the re-building cost of your house will increase due to inflation. It will become more expensive to build the same house, because the material has become more expensive. Most people make the mistake of not adjusting their fire insurance to reflect this, this is why under-insurance in fire insurance is common in Malaysia.

According to Valuation and Property Service Department (JPHH), house prices in Malaysia have increased on average 5.4% in 2015. You can get more insight on the latest article on the Global Property Guide.

You do not need to get a property surveyor each year to evaluate your property. A good agent will have the knowledge and skill to make a good estimate by how much your insurance sum need to increase.

What did we learn from these examples?

In all the scenarios above, we could clearly see that there is a big impact in terms of financial loss as a result of under-insurance. If you have been paying for insurance premium for more than a few years, you will know that there isn’t a lot that you can save in premium by lowering your insured value, especially in comparing with the potential amount that you could lose when a claim arises.

What are other risks of Under-Insurance?

You may be thinking, “OK all is not lost, at least I still get some pay-out if not all”. Hold it right there! You get pay-out from your insurance company IF you are lucky. Your insurance company reserves the right to not pay you at all and cancels the policy altogether. Imagine if the under-insured here is your home and that it is destroyed in a fire. The potential loss could go up to hundreds of thousands of ringgit. Do you have that kind of savings to cover the loss?

So you really need to ask yourself if it is worth taking the risk of potentially losing big for a small saving. We say you shouldn’t. It would be, as we said earlier, penny wise pound foolish to do so.

How does iBanding help?

We from iBanding want to help Malaysians get the correct and best insurance cover. This is why we believe a knowledgeable and trustworthy agent is very important. To help you and others find the right agent, we have created an agent directory for Malaysia. Our agent directory aims to list all insurance agent in Malaysia with a 5-star ratings system in place, so that customers can review and rate their agents.

The review and rating will help you see what other customers think of the agent and it will help the agent with high ratings to do well. We are very supportive of agents who provide the best insurance advice to get more customers. Agents that provide bad service or cheat customers, we want to list too, so that others do not fall into their trap.

You cannot find your agent? Check out iBanding’s Insurance Agent Directory.