Higher excess could leave you with a hefty sum to pay if you make a claim, writes Laura Slattery

Insurance policies are designed to protect people from financial hardship when unfortunate events interrupt their lives - or so the theory goes.

Motorists who dare to make claims on their motor insurance policies could be forgiven for thinking otherwise: often it will be impossible to avoid severe financial penalties following a crash.

Usually these penalties take the form of greatly escalated premiums.

Now stripped of the original no-claims bonus or discount (NCD) of up to 70 per cent on some policies, the new premium could be prohibitive enough to force some younger or less experienced drivers off the road.

This week, however, saw the introduction of a new motor insurance company that does it a different way.

Drivers who buy XS Direct's Excess motor policy won't lose their NCD if they make a claim, because the policy doesn't have an NCD in the first place. However, they will have to fork out for a much stiffer policy excess - the part of a claim that drivers must pay themselves - than they would on other policies.

XS Direct charges an excess of €4,000 to male drivers and €2,000 to female customers, meaning they will not be able to claim for amounts lower than these sums.

Excesses on typical motor insurance policies are much more affordable.

FBD - which, alongside Quinn Direct, emerges as a consistently cheap source of insurance in cost surveys by the Irish Financial Services Regulatory Authority (Ifsra) - charges no excess at all to policyholders aged between 25 and 71 with full licences. (Female drivers who avail of special rates pay €200 in the event of a claim and provisional licence holders pay €125.)

Meanwhile, Quinn Direct is reducing its policy excess from €250 to €190 from June 16th.

At some insurers, higher risk drivers will pay more. For example, at Allianz, the standard excess of €125 rises to €250 for provisional drivers, while at Eagle Star provisional drivers and people aged under 25 pay €315 compared to a standard excess of €190.

Some insurers also charge greater excesses for higher-value or more powerful cars. At Axa, for example, customers driving cars with an engine size of more than 1.5 litres pay €158 in the event of a claim compared to €126 on smaller cars.

Although XS Direct is upfront about the terms and conditions of its policy, burying higher-than-average excesses in the small print is an old trick that insurance companies use to make them appear more competitive than they really are.

For consumers who consider themselves safe drivers, accepting a higher excess can be a good way to keep their annual motor insurance costs down. However, it could prove to be a false economy if they have to make a claim.

At Hibernian Insurance, drivers can choose to reduce their excess to €125 by agreeing to a 2 per cent higher premium. They can also take a 3 per cent discount on their premium by agreeing to an excess of €600.

But this option is not all that popular with drivers. Only a couple of hundred out of Hibernian's customer base of 427,000 have agreed to a higher excess, according to a spokeswoman for the insurer.

The Hibernian spokeswoman points out that the excess on its policies applies only to claims for accidental damage: the insurer will not ask policyholders to pay anything in the event of a third-party claim.

However, on XS Direct's policy, customers must pay its substantial excesses on all types of claims.

If a policyholder crashes into the back of another car and the other driver makes a claim against their policy, XS Direct will meet the liability but then seek to recover the hefty excess from the insured person.

The insurer says its higher excesses along with the absence of a no-claims discount allow it to offer lower premiums.

However, XS Direct admits that its product, underwritten by Wrightway Underwriting, is a niche one, appealing to those who are currently paying high premiums of €1,000 or more. This group might include drivers who have recently lost their NCD, younger drivers, people with expensive or high-performance cars and those moving from a company car scheme.

The NCD has been done away with because it has "very little basis in probability", according to XS Direct. So, if customers do have to make a claim, it will set them back up to either €2,000 or €4,000, but their premiums won't skyrocket afterwards.

All motorists should use the statutory 15-day notice period for motor insurance renewals to shop around for alternative cover to their current insurer. Premiums fluctuate, with companies gaining or losing competitiveness from one year to the next.

The merits of ringing around for quotes are even stronger for drivers who might be in a vulnerable position following the loss of their NCD.

Even if XS Direct does manage to save them a few hundred euro a year, they will have to ask themselves whether the savings are worth the risk of having to pay up to €4,000 in the event of a claim.

XS Direct, which plans to introduce a policy aimed at younger drivers within the next 12 months, claims its excesses incentivise policyholders to adopt a more sensible and cautious approach to driving. Arguably, the threat of losing valuable no-claims discounts on other insurance policies does the same thing.

However, at most of the mainstream insurers, motorists can pay extra for no-claims discount protection, meaning that, if they do need to make a claim, they needn't suffer unnecessarily come renewal time.