Insurance is an important mechanism in protecting individuals or companies from unexpected financial risks. When an insured event occurs, the policyholder can submit a claim to the insurance company to get the appropriate payment. However, in the context of insurance, there is a concept known as an excess claim.
In this article, we will explore the meaning of excess claims, their types, and the implications they have for insurance.
Definition of Excess Claims
Excess claim refers to a situation where the number of claims submitted by the policyholder exceeds the amount of excess or limit specified in the insurance policy. In claims that exceed the excess, the policyholder is responsible for paying part or all of the excess before the insurance company covers the remaining claims that exceed the excess.
The difference between an excess claim and an ordinary claim in insurance can be explained as follows: when a claim is insured, the insurance company usually has a maximum limit that they will pay out as part of the policy. For example, if the maximum claim limit is $10,000 and the amount of claims submitted is $12,000, then $10,000 will be paid by the insurance company and the remaining $2,000 is an excess that must be paid by the policyholder.
Types of Excess Claims
1. Excess Claims Absolute
Absolute excess claim is a type of excess claim where the excess specified in the insurance policy is a fixed amount. For example, a motor vehicle insurance policy could have an excess of $500. If an accident occurs and a claim is filed for $1,000, the policyholder must pay an excess of $500, and the insurance company will pay the remaining claim for $500.
2. Proportional Excess Claims
A proportional excess claim is a type of excess claim where the excess specified in the insurance policy is a percentage of the number of claims submitted. For example, in a health insurance policy, the excess can be set at 10% of the total claim. If someone files a health claim of $ 5,000 and the specified excess is 10%, then the excess that must be paid by the policyholder is $ 500 (10% x $ 5,000). The insurance company will pay the remaining $4,500 in claims.
3. Franchise Excess Claims
Franchise excess claim is a type of excess claim where the excess specified in the insurance policy only applies if the number of claims exceeds a certain limit which is referred to as a franchise. For example, a home insurance policy could have a franchise excess claim of $1,000. If there is damage to the home and a claim is filed for $800, the policyholder must cover the entire claim because the amount does not exceed the franchise. However, if a claim is made for $1,500, the policyholder only needs to pay the excess $500 ($1,500 total claim – $1,000 franchise), and the insurance company will pay the rest.
The amount of money issued by the insurer as a result of these claims usually exceeds a predetermined limit. This of course will have an impact on the costs that must be incurred by the insurer, so that it will add to the burden for the company. Therefore, insurance companies should try to prevent this from happening by setting limits on the number of claims that can be accepted.
In addition, insurance companies should also choose prospective customers carefully, so that the risk that will be borne by the company will be smaller. That way, insurance companies will be better able to maintain their financial condition and not be negatively affected due to excessive claims. Excess claim is a term used to describe the excess of insurance costs over the value of the recognized loss. In general, an excess claim occurs when an insurance company experiences excess costs incurred over the value of the recognized loss. This can happen due to an unequal distribution of risks or due to misuse of insurance.
Insurance companies will usually recognize the excess insurance costs as revenue expenses. This is done so that there is no greater loss to the insurance company. In addition, insurance companies will also look for ways to reduce the risk of excess claims. One way is to limit the number of claims that customers can submit. The insurance company will also consider the customer’s financial condition before accepting a claim. In addition, insurance companies will also use the Underwriting method to assess risks that will occur.
Implications of Excess Claims in Insurance
Excess claims have important implications in the context of insurance, both for policyholders and insurance companies.
Excess claims can have a financial impact on policyholders. The policyholder must pay the excess that is determined before the insurance company pays the remaining claims that exceed the excess. This may require the policyholder to incur unanticipated additional funds. Policyholders also need to consider the excess specified in the policy to ensure that they can pay for the excess if needed.
Excess claims can also affect insurance premiums that must be paid by policyholders. Insurance companies consider the risk of excess claims when determining premiums. The higher the specified excess, the lower the insurance premium that must be paid by the policyholder. However, if excess claims occur frequently, the insurance company may increase the premium to compensate for the higher risk.
Another implication of excess claims is the need for insurance companies to manage the risk of excess claims. Insurance companies use a risk approach and statistical analysis to determine the excess according to the risks faced and regulate risk selection policies. They can also provide education to policyholders regarding excess claims and how to manage them properly.
Conclusion
Excess claim is an important concept in insurance which refers to a claim that exceeds the excess or limit specified in the policy. There are several types of excess claims, including absolute excess claims, proportional excess claims, and franchise excess claims. Understanding excess claims is important for policyholders because it can have an impact on their financial obligations and also affect the insurance premiums they have to pay. For insurance companies, managing excess claims is an integral part of their risk strategy and insurance policies. With a good understanding of excess claims, policyholders and insurance companies can work together to minimize risk and achieve sustainability in the insurance industry.
