Protecting Your Home From a Catastrophic Loss

Mandy Barrett

Being underinsured means you may only receive partial compensation for a loss.

Understanding the implications of under-insurance is crucial, especially when many South Africans are financially strained and looking to cut household costs. While it might be tempting to reduce insurance expenses, the better approach is to review your coverage with your broker. This way, you can review your policies without risking uninsured losses that could be financially devastating.

“In the event of a catastrophic loss, such as a flood or fire – events South Africa has experienced recently – you may need to replace all your household contents and possibly the entire structure,” says Mandy Barrett, of Aon South Africa.

Examples of Catastrophic Losses
The KZN floods of April 2022 left more than 4,000 homes destroyed, displacing 40,000 people and leaving 45,000 people temporarily unemployed. The cost of infrastructure and business losses were estimated at a staggering US$2bn[1]. The vast majority of low-income homes destroyed during the flood were not insured, leaving many families in a financial conundrum.

“When a catastrophic event such as this occurs, we often find that even the homes that were insured do not have enough cover because the replacement cost had not been updated since the home was purchased. If the homeowner’s insurance was cancelled when the bond for the home was paid off, there would be no cover at all. It is a massive gamble to take on your single most significant asset,” says Mandy.

It is imperative to do a thorough cost exercise to confirm how much it will cost to rebuild your home at today’s building costs. It is also important to note that there is often a drastic difference between what your house is valued at (the sale price of your home) and how much it would cost to build the house from the ground up if it is a total loss. “Always insure your home for the replacement value of the building, so that no surprises are waiting for you at claims stage,” says Mandy.

If you are underinsured, you might only be partially covered due to what insurers call the ‘average formula’ at claims stage.

The Average Formula Explained:

Insurance is often viewed as a grudge purchase, but a well-managed insurance plan is crucial for planning and saving for the future. Ensuring your assets are adequately covered secures them for the future.

Paying the right price for the right amount of coverage
It's entirely possible to save sensibly on insurance premiums without exposing yourself to crippling uninsured losses. Aon provides the following tips to ensure that you’re paying the right price for the right amount of coverage:

• Accept a Higher Excess that you can afford: This means agreeing to pay a higher initial amount on a claim.
• Exclude certain items from coverage: Exclude smaller items such as cell phones that are easily replaceable or have a low likelihood of being damaged, lost or stolen e.g. cellphones
• Improve Your Security: Install a good alarm system or upgrade your general security. Underwriters often offer discounts on premiums when security risks are addressed, as claims are less likely to arise.
• Insure for Replacement Cost: Ensure your property (building and contents) is insured accurately for its replacement cost. Avoid the trap of lowering your coverage due to market value fluctuations in the property market.
• Consult Your Broker: Your broker can provide advice on selecting the right coverage and understanding policy terms and conditions. However, always read the fine print yourself and inform your broker of any change of address or improvements to your home, such as installing a new security system.
• Insure your vehicle at the correct value: Make sure you have adequate insurance for high-value items, especially motor vehicles that are at risk both on the road and at your residence. Always insure your vehicle for its retail value and nominate additional drivers who may need to use the vehicle, as some insurers might reject an accident claim if the driver is not nominated.

“A well-conceived insurance program is achieved by consulting with an expert broker who can assess your unique needs, risk profile and budget, and tailor-make an insurance offering that gives you peace of mind knowing that your hard-earned assets are safeguarded in the event of a loss and, most importantly, that you’re paying the right price for the right amount of cover,” concludes Mandy.