What’s the best way to deal with underinsurance?

Underinsurance is a crucial challenge for South African consumers. Statistics show that 79.4% of South Africans are underinsured for the value of their possessions by 51.9%. And one out of three homes in South Africa is underinsured by 77%. 

Apart from affordability, policyholders often fall into the underinsurance trap because they are unaware of their possessions’ replacement value. When they lodge/register an insurance claim, they may find out that their possessions were underinsured. 

The average South African usually has an entrenched view of the insurance industry – often associated with funeral policies and call centres. Most earnestly believe that if they take out a home insurance policy, the insurance company will fully cover their claim for a total loss. The same holds for commercial clients who get insurance coverage for their businesses. Underinsurance is a challenge for the South African business sector too, and only worsens during challenging economic times. 

South Africans generally assume that if they have been paying their insurance premium diligently every month for years, they can claim for their lost or damaged possessions at their replacement value. When it comes to underinsurance, only a few fully grasp the concept of average, which applies in the event of underinsurance. 

For example, suppose Jabu insured his property for R500k, but its actual value is R1m. If the property suffers damage of R250k, his insurance company will only pay 50% of the loss (i.e. R125k) because he underinsured the property by 50%. 

When people know better, they do better

A significant segment of the population needs education on how to avoid underinsurance. 

Customer education
When people are ready to take out a commercial, household, or any other insurance product, the services of a professional insurance broker are invaluable. 

In South Africa, brokers have a fiduciary duty to ensure that their clients know about potential underinsurance. Therefore, insurance brokers play a critical role in educating consumers about how insurance products work. 

Customers must comprehend their policy limits and insurance contract during the advisory stage. Brokers cannot leave out this information until the claims stage. Underinsurance can result in inadequate claims settlements and dissatisfied customers. In extreme cases, brokers found negligent can face litigation or be held liable for incorrect advice. Therefore, stressing the practice of annual reviews to clients goes a long way in avoiding underinsurance issues. 

Annual reviews of policies 

During a year, lifestyles may alter – for better or for worse. From our previous example, let’s assume Jabu faced significant lifestyle changes. In a year, he upgraded his property to welcome a wife and a baby. And its value increased from R500k to R1m. He is a stand-up guy; he was not out to skimp on his monthly premiums but failed to review and update his insurance policies. 

Product design and innovation

Digital engagement can be an effective tool in helping to resolve the underinsurance problem. By incorporating dynamic and innovative digital features into their products, insurers can encourage clients to interact with their policies more meaningfully and conveniently. 

For example, embedding automatic reminders for annual or half-yearly policy reviews can prompt policyholders to update their insurance coverage timeously. Other helpful features include enabling them to add an item to their household insurance by taking a photo of it. When incorporated seamlessly into the user experience, such features can powerfully impact a large portion of the underinsured. 

Beyond adding behavioural change features, engaging with clients digitally can also increase insurance literacy over time. Additionally, it can aid data collection and analysis, enabling insurance companies to create more effective and targeted solutions to benefit their clients’ lives. 

Though customer education and product innovation do not address the underlying economic challenges South Africans face, they are an excellent place to start dealing with underinsurance.