Rand Depreciation Leaves Companies Underinsured

The massive depreciation in the Rand against major currencies over the last two months has left thousands of South African businesses exposed in the event of an insurance claim.

With a substantial portion of imports into South Africa emanating from the US, UK and Europe, the fall in the value of the Rand against the Dollar, Euro and Pound means that the current replacement cost of imported goods has increased by 20% to 40% or more and businesses which are dependant on imported materials or replacement plant may find themselves significantly underinsured.

“Not many business owners have considered the insurance implications that have arisen as a result of the higher than expected rate of inflation and ballooning import costs,” says Paul Goodall, Technical and Special Projects Manager at Lion of Africa Insurance Company.

He points out that from an insurance aspect, almost every company is affected by these events. “Look around your business. No doubt most of your machinery, technology - including printers, computers, laptops and scanners - are imported products. Even much of the materials used in the structure of your property are imported. In Rand terms, the cost of replacement or repair would be considerably more than it was even a couple of months ago.”

When a company takes out insurance on assets, the standard practice is to insure the value of the goods, and build in escalation factors for inflation over the term of the policy. At the start of 2008, this was typically calculated at around 8-10%.

“This is usually a perfectly adequate business practice,” says Goodall. “The recent, rapid depreciation of the Rand, however, has had a huge inflationary effect on the cost of imported goods. If, for example, a fire in a warehouse destroys stocks of imported sneakers, it could cost a great deal more to replace them now than they are insured for. Companies that were previously adequately insured could be faced with losses that exceed expectations.”

Goodall says that while brokers should be contacting their clients to advise them of the need to adapt their policies to the changing economic environment, it is the companies themselves that must take responsibility to ensure they are adequately insured.

“It is important that companies sit down with their brokers and determine exactly what needs to be done to ensure they are adequately protected.”