Underinsurance is a scary reality in the insurance sector

Policy holders are signing on the dotted line and walking away with a false sense of security expecting that if anything should happen to their assets they will be able to replace what they once owned. The frustration felt when claims are paid out at a lesser amount than expected due to average being applied is often expressed fervently with insurers getting the blame. But to whom does the blame actually belong?

Underinsurance can be due to various reasons, the more common being not adjusting for inflation, not insuring new for old, and often a client will insure their goods for a lower amount to save on their monthly premium payments. The policy holder at claim stage will only receive the average that they have insured for and not the full replacement cost that their damaged or stolen goods actually cost. For example a home initially purchased for R800 000 and insured at that amount but which is currently valued at R1 million will only receive compensation on the R800 000 stated in the policy. The same applies for household contents.

Inflation and rising import costs are major contributors to underinsurance as these affect the replacement value of assets. A policy taken out a year ago to cover assets purchased at the same time, will undoubtedly lead to underinsurance when a claim is made today. And with inflation rates set to increase in the near future and possibly again at the end of the year, policy’s need to be re-evaluated to compensate for the new replacement costs.

To avoid underinsurance policy holders will be well advised to have their assets valued and their policy updated on a regular basis. The onus needs to be on the policy holder to have their policies updated, but brokers and insurers should explain this responsibility to them. Brokers and insurers need to take into account the fact that something like underinsurance and the calculations made when claims are processed are foreign to most policy holders. This sort of information needs to be explained in detail to their clients, to avoid the frustration and confusion when compensation is lower than expected.

Some policy holders opt to underinsure their assets to reduce their monthly premiums while taking comfort that if something does happen to their assets they will receive some sort of financial compensation. These individuals consciously take on the responsibility of fulfilling the balance of any financial requirements to replace the assets. “Purposefully underinsuring assets is a risky move, so it is imperative that brokers ensure that their clients understand the consequences of such a decision” says Andrew Lilley (pictured) COO of CIB Insurance Solutions.

“It is far too late to have the policy updated once a claim has been issued” says Lilley. “Underinsurance is a reality, and unfortunately is more prevalent than we would like. We highly recommend that policy holders check that their policies are updated. This includes any new assets that have been purchased and up-to-date replacement cost for existing assets”.