Personal finance: Why do you pay so much? Part 3: household and motor insurance policies

Financial review: how to be prosperous in '99
INSURANCE is rarely sexy or fun. It is at best a practical necessity; in the case of motor cover, it is a legal requirement. There's plenty of competition for business, but many people just renew their car or household cover year after year. They are probably wasting thousands of pounds.

If you are prepared to call round several insurance companies, then you will probably save significant sums. An easy one to sort out is buildings and contents cover.

A large proportion of households buy their cover through their bank or building society. Often borrowers pay over the odds for their cover and the difference can be quite marked. The annual premium for contents cover for a two-bedroom flat in north London with Barclays Insurance Services, is over pounds 300 a year. With Norwich Union Direct, the premium falls to just under pounds 200. A similar policy with General Accident, through insurance brokers Berry Birch and Noble, costs just pounds 120 a year.

Insurance brokers can offer savings because they have access to policies from several insurers. They can also tailor policies more carefully to their clients' needs. Some insurers are not competitive in inner-city areas or prefer not to deal with households where someone works from home.

Sometimes a specialist insurer will take on a risk that larger insurance companies cannot handle, or only handle at a high cost: thatched houses, houses built with timber frames, or rented properties are among the more common examples.

Specialist policies and niche insurers use their claims information to cut premiums without limiting cover. The niche insurance market has moved on from specialising just in high-risk customers - such as people with drink driving convictions - to a broader audience. Older drivers with expensive or high-performance cars can obtain discounts: insurer Guardian Royal Exchange operates such a scheme.

Occupational groups such as teachers can buy cheaper insurance through unions and professional bodies.

"A scheme can be a good idea, because it can be significantly cheaper where it is dedicated to certain occupations or lifestyles," explains David Ross, spokesman at Guardian. "Insurers know their customers better, so they can make a more accurate assessment of the risk."

Judging the right amount of insurance cover is not easy and it is safer to err on the side of over- rather than under-insurance. In the case of a claim where a household is underinsured, the insurance company has the right to scale down the claim proportionally. If the loss adjusters believe that the home was under-insured by 25 per cent, the company would be within its rights to pay just 75 per cent of the claim.

The simplest way to calculate the right amount of contents cover is to make a detailed list of possessions, and then check the replacement cost of the items.

For buildings cover, most surveyors will produce a typical rebuilding cost when they assess a property for a buyer; that sum can then be adjusted for inflation.

Watch out for duplicated cover. Travel policies often charge extra to cover valuables and these might be insured already under a home contents policy.

Two other simple ways to save on premiums are by increasing the excess and improving security. Home contents cover usually has a standard excess - the amount a customer has to pay out of each claim - of pounds 50. Increasing that excess to pounds 100 or even pounds 250 can cut the cost of cover quite sharply as the insurer knows it will not be troubled by small claims.

Many insurers give discounts to non-smokers and households with smoke alarms. It is worth checking what counts for a discount before you spend any money. DIY burglar alarms may well deter burglars but insurers will usually only reduce premiums for a professional alarm installation with a maintenance contract.

Contacts: ABI, 0171-600 3333; Barclays Insurance Services, 0181-253 3200; Berry Birch and Noble, 0800 854074; Direct Line, 0181-686 8877; Guardian Insurance, 0800 282820; Norwich Union Direct, 0800 888223.

General information on insurance is available on the ABI's web site: www.abi.org.uk

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