‘Excess’: Insured, but still responsible

In the previous instalment of Cover Note (October 5, 2026, Policy ‘excess’ does not mean more for you), we saw that an excess or deductible means the first portion of an admissible claim that you must bear yourself.

But why excess? In a motor policy covering a ₹20 lakh car, what difference does a few thousand rupees make? Why do some health policies require a co-payment?

One reason, as we saw, is to discourage small claims and reduce the time and administrative costs of processing them.

Suppose your excess is ₹1,000 and your loss is ₹2,500. You may decide that making a ₹1,500 claim isn’t worth the trouble, or you may go ahead. The excess thus influences not only how much the insurer pays, but also whether a claim is made at all.

No-claim bonus

There is another reason to think twice before making small claims, especially under motor and health policies. It has nothing to do with excess. It is the no-claim bonus, or NCB.

The NCB rewards claim-free years, either through a discount on renewal premium or an increase in the sum insured, depending on the type of policy. And this matters to you because making a claim may mean losing some or all of the accumulated bonus.

Consider a car policy with an annual own-damage (OD) premium of ₹10,000 before NCB and an accumulated bonus of 50%. You would normally pay ₹5,000 for the OD renewal, assuming the base premium remains unchanged. But if you make an admissible own-damage claim, even for ₹2,000, you could lose the entire NCB and have to pay ₹10,000 instead.

That is ₹5,000 in lost discount for a claim of ₹2,000!

When to make a claim

So, you should make a claim only if what you stand to receive exceeds the no-claim bonus.

Of course, health insurance NCB provisions work differently, and some motor policies offer NCB protection. So, check your policy to see what happens to your bonus when you claim. Compare the possible loss of NCB with the amount you stand to receive and make an informed decision.

But excess serves a purpose beyond discouraging small claims.

Insurance is founded, among other things, on the expectation that the insured will behave as a prudent uninsured — taking reasonable care to prevent losses and minimise their consequences.

Just as the insurer is your partner in misfortune, you should endeavour to be its partner in good fortune by making every reasonable effort to avoid losses. An excess reinforces this responsibility. By ensuring that you bear a portion of the loss, it gives you a financial interest in preventing it. You are encouraged to be as careful with the insurer’s money as you would be with your own.

It is somewhat like the margin you contribute when taking a housing loan. The lender finances most of the purchase, but your own money is also at stake.

Specified risks

The larger idea is that insurance is not intended to take every financial consequence of every loss off your hands. It provides protection against specified risks, while leaving you responsible for the portion you have agreed to retain.

An excess, therefore, is not necessarily a shortcoming in insurance protection. It is part of how that protection is designed.

(The writer is a business journalist specialising in insurance and corporate history)