Excess

What it means

The excess is the part of a loss the insured bears. It is usually a fixed amount, a percentage of the loss, or both with a floor.

Its size drives the premium directly: a higher excess means a cheaper policy. Choose it by the loss the company can absorb from its own funds without threatening operations.

An excess should not be confused with underinsurance. The excess is agreed in advance, and the company knows exactly what it will pay itself when a loss occurs. Underinsurance creeps in when the sum insured is below the real value of the property, and the insurer then cuts every payout proportionally, even for a loss far below the sum insured.

How it works in practice

Company policies often take a higher excess so small losses are never claimed at all. Insurance then covers what genuinely hurts rather than a broken pane of glass.

In the books the excess is an ordinary repair cost. The reduced payout goes to income, so the accounts show both sides of the event.

We book the claim against the insurer at the amount the insurer confirms in writing after deducting the excess, not at the client’s estimate. If the loss happened before year end and no decision has arrived yet, we record the expected payout as an accrued estimate, so the repair and the compensation fall into the same period.

What to watch out for

With several losses in a year the excess is paid on each. A company with ten small claims can spend more on excesses than a slightly higher premium without them would have cost.

A percentage excess looks harmless on a small claim, but on a total loss or a stolen car it is calculated from the vehicle’s full value. A company that looked only at the minimum excess amount when choosing the policy then finds it has to pay far more out of its own pocket than it expected.