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SIMON BROWN: I’m chatting now with Ernest North. He is, of course, co-founder of Naked. Ernest, appreciate the early morning. Insurance. One of the things we hope never happens is that we have a car accident and our car needs to be written off. My question is: How does an insurer make that decision as to whether to write off the vehicle or to not post an accident?
EDWARD NORTH: Good morning, Simon. It’s nice to be chatting to you again. Yes, I think it’s an important question because many consumers are unfortunately surprised when they find that they are in that situation, because it seems as though the car is not damaged that badly in their opinion, and then the decision is made to write it off. On average how the decision is made depends very much on the specific car and the specific availability of parts for that particular car. On average it can be anything between 40% and 60% or 65% of the value of the car – that being the quote for the repairs when the decision is made to rather write off the car.
The first thing that is important for the consumer to remember when that decision is made is that the two upsides for you as a consumer are, number one, that you don’t have to face the future risk of your resale being impacted by the car having been in an accident. When you are trying to sell a car, your resale price is typically significantly lower if you have to disclose [the accident] or if someone does an investigation and finds there is still lingering damage. So I think that’s the first consideration.
The second consideration is that very often the unseen damage creates risk that goes beyond what that initial quotation is to repair the car. As an insurer looks at that damage and that risk, it weighs up the fact that if we repair this car and give it back to the client, this car is going to come back two or three times because there are issues that keep coming back. Economically it is not worth it for the insurer.
But just as importantly for the convenience of the consumer, that just doesn’t make sense and so very often it feels surprising. But overall, the decision to write off the car is one that makes more sense.
SIMON BROWN: I get you. It’s around that sort of ballpark – around 50% of the value. In my case the car didn’t seem very damaged, as you say, but it was an old car. So the value of the car wasn’t very much either. And then the money? If you owe anything to the bank, I imagine the insurer is going to route that directly to the bank; and if there’s anything left over, that goes to the individual. But the bank is paid first.
EDWARD NORTH: Absolutely. That’s part of your insurance contract. There’s a clause that says that if that car is being financed and there’s still money left, we pay the bank first. If the loan that needs to be settled is smaller than we owe in total, then we pay the balance to you.
I have to say that it is it is unfortunately a reality in South Africa that the nature of our relatively high interest rates, compared to what depreciation does on a car, means that very often people are left with a shortfall.
So what is important is when you do buy your car insurance policy, tick the box. And very often if you do it on the app, like the Knight insurance app, it’s a simple click on the box. It adds shortfall cover. That is roughly R50 a month, so that if there is that gap of R30/R40 000, the insurer pays it as part of the settlement.
SIMON BROWN: That was going to be my question, because we get it in medical aid. We get it in vehicle insurance at the same time.
What then happens to my vehicle which has been written off is it’s now your vehicle. It now belongs to Naked. It’s no longer mine. It’s not the bank’s. What happens to it then?
EDWARD NORTH: Yes, it is the property of the insurer. There are a number of different things that happen, especially for brands where there is a significant shortage of parts or a high demand for parts.
We are quite successful in selling especially the parts; the mechanical parts are the most important ones. But then the body parts as well. So a door or a window or things like that. Those things are often in very high demand. So [one is] selling just one piece of the body. There are people who specialise in this and, overall, it’s economically valuable, but it’s not something on which the insurer makes a big profit. It’s something that we do in the long run to keep premiums down, but it’s not something from which we make significant profits.
SIMON BROWN: Yes.
EDWARD NORTH: There are cases where the consumer asks us to have the car back. We are completely open to that, and you can buy that car from us – very often at a very low value. We do caution, though, that obviously that comes with a lot of risks. Your chance of being able to repair that car to a point where you can insure it again is very, very low. So I would caution against that.
Obviously there are some cases where people have a hobby or have a sentimental value for that car and then we’re absolutely open to that. But for an average consumer, just getting the cash and then being rid of the dangers, the risks of this car giving more trouble in future, is often the safe way to go.
SIMON BROWN: I take your point. In a crashed car there could be structural damage. There could be tons. Most of us are not experts on damaged cars.
We’ll leave it there. Ernest North, co-founder of Naked, always appreciate the early morning insights.
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