June 21, 2024

Insurance excess: How it works?

Thinking about Insurance Excess

Excess, also known as a deductible, is a common feature in insurance policies. If you make a claim and it’s accepted, your insurer will pay the repair or replacement costs that are over your excess amount.

Typically, the more excess you pay in the event of a claim, the smaller the amount you must pay as a premium, so it’s all about finding the balance between your monthly costs and how much you can afford to pay if the worst happens.


How excess works

Let’s say you have a home repair bill of $10,000. You agreed to pay a voluntary excess of $2,000. That means you must pay the total excess of $2,000 first, and the insurance company pays the remaining $8,000.


Here are a few reasons why insurance policies include an excess:

Risk-sharing: Insurance companies use the excess to share the risk with policyholders. By requiring you to pay a portion of the claim, the insurance company can keep premiums lower for everyone. It encourages responsible behavior and discourages frequent or small claims that can drive up costs for insurers.

Eliminating small claims: Insurers often set a minimum excess amount to discourage policyholders from making small or impractical claims. Processing small claims can be costly for insurers, so by setting an excess, they can reduce administrative expenses and focus on larger, more significant claims.

Preventing moral hazard: Excess helps prevent moral hazard, which refers to the increased likelihood of risky behavior when individuals are protected by insurance. If there were no excess, people might be tempted to make claims for minor damages or be less careful in protecting their insured property, leading to increased costs for insurance companies and potentially higher premiums for all policyholders.

Promoting cost-consciousness: By including an excess, insurance companies encourage policyholders to be more cost-conscious and selective about the claims they make. It ensures that people consider whether the cost of a claim is worth paying the excess and potentially facing higher premiums in the future.


Does raising your excess save you money?

Increasing the excess on your insurance can be financially worthwhile in some cases. But you need to weigh up the pros and cons, to help you decide if it’s the right option for you.

Adding an excess can lower the cost of your insurance premium – the amount of money you pay for an insurance policy. This is because the insurer won’t have to pay out as much in the event of a claim. Paying a lower premium means saving money on your insurance coverage.

However, you should consider your total insurance excess and make sure it’s at a level you feel comfortable paying in case you ever need to make a claim. Don’t raise your excess beyond what you can afford to pay towards a claim.


It’s important to note that excess amounts can vary depending on the type of insurance and policy you have. Some policies may have a fixed excess amount, while others may offer options to choose a higher or lower excess in exchange for different premium rates. Always review your policy documents to understand the specific terms and conditions regarding excess in your insurance coverage.

Talk to Arma Insurance Brokers to help and guide you with your insurance needs.

Contact us!

Phone: 02 4932 4444

Email: maitland@armainsurance.com.au