Consumers urged to heed inflationary impact on existing insurance policies

Increases in South Africa’s consumer price index (CPI) is putting consumers at risk of gross underinsurance if they do not reassess the replacement value of their goods insured and the total sums insured.

This is according to Joe Bizjak, Executive of Finance at Lion of Africa Insurance, who advises that policyholders should regularly review their insurance policies to ensure that they are adjusted for inflationary increases, in order to safeguard themselves from financial loss.

“In the past four months we have seen consecutive increases in the CPI as reported. Furthermore, because we are coming out of a period of decreased inflation, there is a certain complacency towards the current CPI increases as we are still within the target band of 3 - 6%. However, one must not underestimate the adverse impact of these changes on the replacement value of insured assets.”

Headline CPI was up 0.5% to 3.7% for the period September 2010 to January 2011. Bizjak says this would impact some insurance policies and warns that it is the responsibility of the policyholder to ensure that their insured values are a true reflection of the current replacement value of the item. “A broker or insurer can only recommend certain action, but they cannot adjust the policy unilaterally on behalf of the insured.”

He advises South Africans to reassess their insurance policy at least once a year. This involves evaluating the inventory list of their insured items and the estimated replacement value of each individual item on the list as scientifically as possible.

“The most important thing is to ensure that the inventory list is strictly completed and maintained. The estimated inflation factor for each individual item on the list needs to be carefully considered. The blanket application of the CPI index, which is a measure based on the pricing of an average basket of goods in South Africa, may result in the under-insurance of certain items,” he says.

Bizjak says there are various insurance contract options available to policyholders in order to minimise their exposure to inflation-related losses.

“The insured can elect an escalator clause extension, in terms of which the specified sum insured will be proportionately escalated by a factor to compensate for inflationary increases. Some insurers have scientific rating models that are used to determine premium pricing and which take into account inflationary influences on expected insurance claims such as building cost inflation.”

There are other instances where the replacement value is reassessed depending on the sum insured or nature of risk. “For example, in the case of a building such as a chemical factory that falls in a high risk category, we would commission a risk-survey of the building at least once every three years to not only establish and consult on risk mitigation strategies, but to ensure the adequacy of the sums insured and expected escalations thereof - all potential costs in the case of a claim need to be realistically considered. This would include, among other, labour costs and the cost of parts, as well as any associated imported inflation.”

Bizjak explains that inflationary increases will have a dual impact on the policyholder – the value of the sums insured and the premium rates.

“By regularly assessing your inventory list and the sums insured, you can eliminate the risk of carrying the cost of under-insurance as a result of inflation. Secondly, by shopping around and obtaining comparative quotes you ensure that the effect of inflation on your premium is kept to a minimum,” concludes Bizjak.