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Andrey Kosenkov told Liga.net about the impact of national currency depreciation on indemnity under CASCO car insurance.
CASCO policy holders have already been asking themselves whether or not their insurance will cover all the repair expenses for their vehicles since the sum insured expressed in UAH and stated in their policies does not correspond with the current market value due to the high inflation Ukraine has been suffering lately. At the same time the cost of maintenance stations services as well as the price for spare parts has surged due to the major depreciation of the national currency. Car owners are right to have worries as they are facing “underinsurance” which is defined both by the Insurance Act of Ukraine and insurance policies and entails partial or proportional indemnification.
Let’s look into the essence of the underinsurance. It all comes down to the following principle: if the market value of an insured object is bigger than the sum insured stated in the insurance policy, either due to the deliberate choice by the Insured of the inadequate number or due to the inflation in Ukraine triggering the significant growth of prices , the insurance indemnity is paid at the same proportion at which the sum insured relates to the market value of an insured object meaning that one way or another indemnification is paid only partially.
The same principle is applied to total loss cases in which the cost of the repair exceeds 70 % of the car’s value.
For example, let’s take a Toyota Camry produced in 2008 and insured in May 2014 for the then market value of UAH 140,000. Today its market value equals UAH 350,000 since USD appreciated greatly adding to the inflation in Ukraine.
There are three options available within the Ukrainian insurance market for calculating indemnity for this car in the case of an insured event:
Option 1. It is the best case scenario for the Insured. The relation of the sum insured and the market value is fixed as of the date the insurance agreement was concluded.
Getting back to our example – with the insurance sum being UAH 140,000, the Insured is entitled to the full indemnity for the losses under UAH 98,000 which accounts for 70 % of the sum insured and marks the total loss. If a total loss or a car theft does take place, the indemnity will be equal to UAH 140,000 adjusted for the deductible amount. There is a risk, though, that the total loss will be recognized intentionally since the car’s market value is much less than the sum insured.
Even if your insurance policy stipulates that the relation of the sum is insured to the market value of an insured object and is calculated as of the date the agreement was concluded, it is recommended you make sure these two figures are equal.
Option 2 Represents a bad case scenario for the Insured. It comes down to calculating the sum insured/market value relation as of the day the loss took place. In the example discussed above the proportionality factor equals 0.4 (140,000/350,000) meaning that the Insured is entitled to maximum indemnification in the amount of 40 % of the loss. If the insured’s car is damaged in the traffic accident and the cost of the repair constitutes UAH 50,000, the insurance company is liable to pay only UAH 20,000 (50,000*40 % = 20,000). Obviously, the car owner will have to pay the difference out of his own pocket which is not a little sum of money especially considering inflation Ukraine’s economy suffers. . The risk of facing the total loss being recognized intentionally still stands. That’s why it is reasonable to amend your insurance policy to avoid underinsurance. Saving a penny on insurance today may entail spending a dollar in the future.
Option 3 Is the worst case scenario. It stipulates an inclusion of the “currency clause” within the insurance policy. It provides for the liability of the Insured to increase the sum insured proportionally to the currency exchange rate (USD/UAH, or EUR/UAH) fluctuation if the latter changes for more than 20 % (normally). However the currencies’ exchange rate and the car’s value do not have complete correlation especially in the aftermarket since a number of other factors influences the price of the car. Customers’ paying capacity is one of them. The plummeting of the USD exchange rate from UAH 8 to UAH 25 hasn’t resulted in 300 % growth of car prices even despite surging inflation in Ukraine. Besides, the logic runs, the currency clause should also stipulate the partial refund in case of the national currency revaluation. Unfortunately, this is never the case in the national insurance market.
Finally, it is recommended that all car owners take a close look at their insurance policies to find out which option of the above they are facing in case of an insured event. Besides, a lot of insurers are willing to offer up to 50 % discount for the insuring difference in the sum to retain their clients.