Sad inflation numbers bad for your insurance – FNB Insurance Brokers
SAD news on inflation and the depreciating rand could be bad news for short-term insurance customers if they fail to keep pace with changing replacement values.
The consumer alert comes from FNB Insurance Brokers, short-term insurance arm of the FNB financial services group.
Chief Executive Officer Barry Taylor (pictured right) points out: "many categories of goods, especially consumer electronics and engineering equipment, are imported. Adverse exchange rates therefore push up the local price of items such as computer hardware and software and manufacturing plant and equipment. Since the beginning of the year, the depreciation of the rand against the euro, South Africa’s major trade currency, is 19%.
“General inflation, now in double digits, also affects everything from your furniture to your fridge to your plant and machinery.
“The impact is felt not only on your wallet, but in your insurance cover – a fact many policyholders forget.”
Growing costs significantly increase replacement values, even over a relatively short period. The problem is compounded if customers fail to adjust insurance provisions for several years.
“In effect, the customer accepts personal liability for the shortfall,” explains Taylor. “Policyholders have to make good from their own pockets. This can be difficult if the shortfall rises to tens or even hundreds of thousands of rands.
“Sometimes a customer just can’t afford to make up the loss. It can be heart-breaking. But, while the risk of under insurance rests with the customer, losses can be mitigated through effective planning and application of advice from your intermediary.”
Under-insurance can be traced to a mismatch between the level of premiums and the level of financial exposure.
The sum insured is based on replacement values not historical values. The replacement value is reflected in the premiums. The company underwriting the policy is only required to settle claims in relation to the insured sum as set out in the policy.
Where under-insurance is evident, the underwriter pays on a pro-rata basis. For example, if the replacement value is twice the sum insured, only half the claim might be met.
Taylor notes: “The under-insurance problem affects both businesses and the consumer who insures his or her personal assets.
“It’s a shock when you realise that all your assets have to be replaced, but the settlement won’t stretch to half the total cost. That’s why it’s essential that consumers and insurance buyers become aware of these issues.
“Inflation has been relatively well controlled and the rand had a good run until recently. Many insurance buyers have therefore forgotten about the replacement value issue. Now’s a good time to remember.”
The good news is that the solution is relatively simple.
“Call in a reputable broker,” says Taylor. “Professional intermediaries are trained to assist with a thorough inventory of insured items, enabling an up-to-date assessment of replacement values.
“Make a point of carrying out an exercise like this at least once a year. Constant vigilance is needed to keep under-insurance at bay.”
