You can’t afford to be under-insured

South Africa is said to be more exposed than most countries to loss from the likes of crime, burglary, vehicle claims, car hijacking, theft etc, yet insurance industry figures are that about 40% of insurance policyholders are under-insured and that this figure could be growing as household budgets come under increasing pressure.

This poses the risk of serious financial loss according to leading insurance brokers, Aon Risk Solutions South Africa and the temptation to reduce covers should be strongly resisted.

Mandy Barrett of Aon South Africa says: “It’s scary that frequently, it’s not just a matter of home theatres, Raybans, clothes and the like being under-insured.

“As serious as that may be, often major possessions such as cars, household possessions and property are not properly covered either and the situation could be getting worse as consumers seek to off-set rising transport, electricity and other day-to-day cost of living expenses.

“What this means is that, in the event of a claim, you are likely to be paid out only partially for the loss. That’s because of what the insurance industry describes as the “average” formula and it works like this:

You insure household contents for, say, R250 000. But in fact their replacement value is perhaps double that amount, so you are effectively 50% under-insured. Should you suffer a loss of say, R40 000, the insurance company will therefore pay only 50% of the claim, i.e. R20 000 and you are out of pocket for the balance.

Now imagine what it would mean if you have under-insured your home, something that’s highly likely with building replacement costs for property having increased in spite of the general slowdown of market values.

“Take the example of a home bought 15 years ago for R500 000. As building costs have increased over the years, its replacement value has appreciated accordingly to, say, R2 500 000 at today’s prices. If the sum insured is not increased to reflect this increase the under-insured component could be as much as R2m!

“Bond insurance would cover the original loan from the bank if the home was financed in the typical way. That cover is adjusted annually by the bank but it will almost certainly not match the construction replacement value of the property at today’s costs.

“Then consider your family vehicles. With our unenviable accident rate, poor standard of driving, car hijackings and theft, reportedly one in four vehicles is subject to a claim annually.

“Here it is not merely a case of possible under-insurance as replacement costs increase, but also of choosing the right cover.

“The key is the ‘Basis of Loss Settlement’ in your policy document. But policy wording differs in this respect and you could be in for a nasty surprise in the event of a loss. It all has to do with the values used in defining that basis, notably retail and market value.

“Retail value is the price at which the dealer will sell a second hand vehicle to you. Market value is the average of the difference in price between retail value and trade-in value, i.e. what you could expect to receive from a dealer and it’s here that you need to be aware of being under insured if you wanted to replace the loss fully.

“Many policies will, in fact, pay out at brand-new-out-of-the-box value, also known as list price, but usually only for no more than six to 12 months after purchase, reverting to cover for market value or retail value thereafter.

“And don’t forget the cost of replacing investment items such as art and jewellery - the price of gold and platinum has soared in recent years - and art sales in South Africa are realising record prices so that Maggie Laubser on your wall that you picked up quite cheaply 15 years ago, may now be worth a great deal more and while a work of art can’t be replaced as such, its market value has to be built into the calculation of your cover for household contents. And not forgetting the cost of curtaining, expensive Persian carpets, designer lounge suites and clothing. It all adds up.”

A few tips from Barrett;

• Insure the contents of your entire house, not just what you think may be stolen in a burglary. Revalue your insurable goods every 12 months at least and adjust your cover accordingly.
• Make certain you are insured at replacement value – unless you are happy to take a risk on having to make up the shortfall in the event of a loss.
• Add valuable new purchases and gifts to your policy description. Have family heirlooms and art work valued and take out specialist cover where needed.
• Employ a broker to negotiate the best deal for you – remember your individual circumstances can influence the rates you are charged and if you combine motor cover with household cover you get a better overall rate.

“That makes considerable sense particularly as insurance companies tighten up their rates to protect their margins and make provision for increases in their capital to allow for rising claims.”