Take care with the advice you give regarding valuations
A recent Moonstone Monitor presented some interesting views on a recent FAIS Ombud decision that brokers assist their “clients in determining a realistic valuation of their insured goods.” This is another in a list of determinations that highlight shortcomings in the advice aspect of selling financial services products. To quote from the act, and adviser is expected to “Act honestly and fairly… in the interests of clients and the integrity of the financial services industry.”
Causing confusion
Responding to Moonstone’s initial article on the FAIS Ombud rulings, a broker in the Free State expressed confusion over the determination. In her experience the value of a total loss is based on the fair market value of the vehicle regardless of how much the vehicle was insured for. This value is determined in line with the Auto Dealer list for the month in question. Moonstone’s reader adds that insurance is not a tool for enrichment – and that items should only be insured for what they’re worth. If the determination holds, then there would be nothing to prevent clients from similar attempts to benefit from incorrect valuations of household contents and motor vehicles.
The FAIS Ombud is quite familiar with the total loss concept. A quick look at yesterday’s FAnews Online newsletter confirms this. When awarding damages against the broker in the Mannie case the FAIS Ombud based his settlement on the fair market value of R166 500 even though the vehicle was insured for R250 000. There was no comment in this determination about the excessive insured value on the vehicle...
A broker is not a valuator
In another response to the FAIS Ombud determination, a Moonstone reader comments that insurance brokers are not in the business of valuing assets. According to him valuations provided by brokers can, at best, be viewed as guidelines or estimates. Even the undisputed champion of motor vehicle valuations (the Mead’s Auto Guide) cannot be accepted as gospel truth. You should let your clients know that the values published in this guide are not always 100% accurate due to variations for kilometres travelled and vehicle condition. One of the suggestions were to recommend that the client values his vehicle at an independent motor dealer.
And here’s an interesting point. If we assume that insurers were to use the ‘three quote’ technique to value vehicles: What happens when the insured pays premiums on the Mead Auto Guide valuation, only to learn at the time of total loss that the insurance company’s market valuation is significantly lower? This scenario is quite plausible in today’s tough economic conditions. If you used an average price from three motor dealers, for example, the likelihood of this value being lower than the retail (and even trade) value in the guide is very high. This means the insured has been overpaying premiums on the good faith assumption that the Auto Guide valuation is correct.
The law is a living thing...
It’s said that the law is a living thing. In this regard the FAIS Act is no different. Each FAIS Ombud determination clarifies how sections of the legislation will be applied. If you pay close attention to the letter of the law in the first place you probably don’t have too much to worry about. But it makes sense to keep an eye on the cases that the FAIS Ombud presides over.
It is essential that you equip the client with the tools to make use of specialised and / or professional valuation services. You should be advising the client of the dangers of underinsurance or over insurance as a matter of course – assisting with fair value assessments is probably a good way to make sure your client takes adequate cover. As always, remember to document your advice – and have your client sign to prove that the advice was presented to them.
Editor’s thoughts:
The correct valuation of household goods and motor vehicles is essential in determining the correct premium level at a short-term insurance policy inception. It’s also a good idea to recalculate this value on an annual basis – and advise your client to update his insurance policy whenever he purchases a new household appliance or item. Add your comments below, or send them to [email protected]
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