Why doesn’t your premium drop when you lower your building’s sum insured?

Many property owners assume that if they reduce their sum insured by 20%, their insurance premium should also drop by 20%. It sounds fair, but in reality, that’s not always how it works. Let’s unpack why that is

A simple example

Imagine a small community scheme with five townhouse units, each valued at R2 million from a replacement value perspective. That gives us a total sum insured of R10 million.

Let’s say the annual premium for the building is R8,000, which works out to R667 per month.

Now, a new valuation comes in at R8 million. You realise you’ve been overinsured by 20% and decide to reduce the sum insured accordingly. Naturally, you expect a 20% premium reduction as well.

But the new premium doesn’t always reflect that same percentage drop, and here’s why.

Insurers don’t just look at sum insured

Insurance companies use various models to calculate premiums. These models include factors beyond just the sum insured. For example:

• Geyser coverage or other built-in risks may remain unchanged.
• Risk bands in the underwriting model may indicate that you were offered a better rate at R10 million than at R8 million.
• Most importantly, your claims ratio matters.

Let’s break that down further.

Understanding claims ratio

Your claims ratio is the percentage of your premium that’s been used to pay claims. For example:

If you paid R8,000 in annual premiums,

And your insurer paid R4,000 in claims that year,

Your claims ratio is 50%.

Now, if your sum insured drops to R8 million and the insurer reduces your premium by 20%, your new premium becomes R6,400. But your past claim amount of R4,000 hasn’t changed.

That means your new claims ratio is now 63% (R4,000 of R6,400), not 50%. This is riskier for the insurer.

Most insurers work with a target claims ratio, often around 55%. To maintain that, they may only reduce your premium to R7,273, not R6,400. That’s a discount of about 9%, not 20%.

Why you might get no reduction

If your past claims ratio is already high, say 100%, then reducing your sum insured may not result in any premium drop at all. The insurer still anticipates claims based on your history, and a lower premium would push their risk higher.

In such a case, you might decide to remain overinsured and simply note the difference for the next renewal.

So, what should you do?

Here are two key takeaways:

Don’t assume a direct link between a lower sum insured and lower premium. Always ask your insurer for a quote first before instructing a change.

Consider both directions: Increasing your sum insured might not increase your premium if it improves your claims ratio. In some rare cases, it can even reduce your premium due to better risk categorisation.

Real-world example

In one unusual case, a scheme on the West Rand increased their sum insured, and their premium was reduced. This was due to a better rating in the insurer’s premium banding and an improved claims ratio.

The bottom line

Your insurance premium isn’t just about the sum insured. Claims history plays a major role. That’s why it’s always wise to:

• Review your claims ratio,
• Ask for a quote before making changes,
• And weigh the overall impact, not just the percentage difference.

For a deeper dive, check out our explainer video on claims ratio and how it affects your premium.