Your insurance company has been increasing the amount of any claim that you have to pay yourself before they pay out. This amount is known as the excess. They are doing this because most people just look at the headline price of the insurance and don’t take into account the excess.
But why do insurance companies charge excesses anyway?
They do to it to try to reduce ‘moral hazard’. Moral hazard happens if the insured person changes their behavior to take more risks than they would have done without insurance. They do this because they aren’t so worried about an accident once they are insured.
Take the example of a car driver, if they are insured then maybe they will drive a bit more recklessly, or worry less about keeping their car in good condition.
Research has consistently shown that company car drivers have more accidents than people driving their own car. They are still taking the risk of physical injury but they are not risking any financial loss if they have to make an insurance claim.
They don’t have to pay any excess so they have less incentive to drive safely.
If companies introduced a penalty for drivers who have accidents then they would reduce the moral hazard and see accidents reduce. Research by Gregersen et al in 1996 showed that driver training was more effective at reducing accidents than a monetary bonus. The problem here is that a bonus for not having an accident is not the same a penalty for having an accident.
Today’s takeaway: Make sure you aren’t introducing moral hazard into your company by protecting your employees from the impact of their behavior.