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Personal Lines Insurance
Tuesday, July 1, 2008
Inflation warning

The news is not only bad on the subject of inflation and the depreciating rand, its also bad for those short-term insurance customers who fail to keep their insured values in line with new replacement values.
Chief Executive Officer of FNB Insurance Brokers Barry Taylor points out that  “Many categories of goods, especially consumer electronics and engineering equipment, are imported. Adverse exchange rates therefore push up the local price of items such as computer hardware and software and manufacturing plant and equipment. Since the beginning of the year, the depreciation of the rand against the euro, South Africa’s major trade currency, is 19%.
“General inflation, now in double digits, also affects everything from your furniture to your fridge to your plant and machinery. The impact is felt not only on your wallet, but in your insurance cover – a fact many policyholders are forgetting.”
Growing costs significantly increase replacement values, even over a relatively short period. The problem is compounded if customers fail to adjust insurance provisions for several years.
“In effect, the customer accepts personal liability for the shortfall,” explains Taylor. “Policyholders have to make good from their own pockets. This can be difficult if the shortfall rises to tens or even hundreds of thousands of rands.
“Sometimes a customer just can’t afford to make up the loss. It can be heart-breaking. But, while the risk of under insurance rests with the customer, losses can be mitigated through effective planning and application of advice from your intermediary.”
The sum insured is based on replacement values not historical values. The company underwriting the policy is only required to settle claims in relation to the insured sum as set out in the policy. Where under-insurance is evident, the underwriter pays on a pro-rata basis. For example, if the replacement value is twice the sum insured, only half the claim might be met.
Taylor notes,  “The under-insurance problem affects both businesses and the consumer who insures his or her personal assets. It’s a shock when you realise that all your assets have to be replaced, but the settlement won’t stretch to half the total cost. That’s why it’s essential for consumers and insurance buyers to take these issues seriously.
“Inflation has been relatively well controlled and the rand had a good run until recently. Many insurance buyers have therefore forgotten about the replacement value issue. Now’s a good time to remember.”

Copyright © Insurance Times and Investments® Vol:21.6 1st July, 2008
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