As South Africa braces itself for another credit downgrade by a ratings agency, the rand has already lost at least 10% of its value against the US dollar and the slide looks set to continue. This has serious implications for the sums insured on personal and business insurance policies when it comes to imported assets such as machinery, equipment, appliances, tech gadgets, motor vehicles and parts. But many South Africans don’t factor the knock-on effect of the Rand’s depreciation along with inflationary pressures into the sums insured on all insurance policies and the cost of premiums down the line. The weaker Rand escalates the replacement costs of imported goods and has an impact on the insured value of property and assets. Mandy Barrett of insurance brokerage and risk advisors Aon South Africa spoke to David O’Sullivan about the issue.
Mandy, we’ve had two recent downgrades by ratings agencies. What impact has that had on the currency?
Well, what we’ve seen since the rating downgrades is that the Rand has dropped approximately 12% against the Dollar since the end of March. That obviously has a massive impact on inflation and a direct impact on how you need to insure. So I think if we look at insurance, insuring your home, insuring your contents, insuring all those gadgets that you carry around with you and even your motor vehicle, as the Rand depreciates, so the cost of replacing those items increase and the need to insure them.
Is this something that your clients are aware of?
I don’t believe that people are as aware as they ought to be. What we do see is one of the most common causes or when a short payment on a claim is due to underinsurance. Underinsurance is really where a client either has not insured their building correctly or their household contents insured is not insured for the full replacement value. What happens there is that the insurers apply what they refer to as “the average clause” and that basically applies in the way that if you are 20% underinsured on your household contents, as an example, that 20% will be deducted off your claim, so you would only get 80% of the claim out. So, it is important to constantly review sums insured to make sure that they are adequate to replace the full items at today’s prices.
When it comes to insuring a person’s home, do you find that people tend to insure their homes based on the amount they paid for the house in the first place and then never revisit that number?
That is certainly common behavioural practice and what we see is that people do insure their homes at market value and generally what insurers do, is they will place an inflation value of between 6% and 8% on your building every year as your policy renews. That 6% to 8% is not proficient to allow for the sum insured increasing to what the current new replacement value is today. What we also see is that clients build onto their homes, they do improvements, and that is not taken into account either. Therefore, it certainly is very important to relook at what it would cost to replace the building at today’s prices and insure on the correct replacement value.
You make the point about imported equipment, gadgets, vehicle parts, designer furniture, and smart devices; they’ll all come at a much heftier price tag today than they did a year ago because of things like inflation and the depreciation of the Rand. Do people take that into account?
Absolutely, it is important to constantly review and we recommend that the client review their cover at least every 12 months to make sure that those values are in line with current inflation and current replacement value. A specific area is on jewellery. We know that jewellery is quite significantly affected by currency fluctuations and one area the consumer should look at is revaluing their jewellery on a regular basis to make sure that it is insured for the correct replacement value.
Is it your advice that people should consult with their broker and do an insurance needs analysis at least once a year, possibly once every six months?
The broker will take you through an insurance needs analysis to make sure that you fully understand the risks that you face and to ensure upfront that you won’t have a problem at claim stage. We help our clients reduce their risk, understand their risk, and also look at what risks we want to absorb. We all know that in the current economy we’re looking to save premiums. So what don’t I need to insure, do I really need to insure that smart phone when I have another five lying in the cupboard and rather use that money to make sure that those very expensive items that I can’t afford to replace myself are correctly insured.
Mandy, how big a problem is underinsurance, people not understanding that the amount for which they are insuring their property, their possessions is not adequate in the current economic climate?
I think is a significant problem in the insurance industry and specifically on homes, buildings, and the contents of the home because both items need to be insured on replacement value. We’ve chatted about not insuring on market value on your building, but rather on replacement value, but then when we chat about household contents, we think we have a lounge suite or a TV that is ten years old and it’s really not worth anything in our eyes, but we are insured on replacement value. Those items need to be insured on what they would cost to replace today.
Also, we have items lying around our homes like a collection of books and that kind of thing that we really don’t see value in, but when it comes to insurance, insurance doesn’t discriminate between items and every item in your home is covered in terms of the insurance policy and all those items consolidated need to reflect that replacement value. So, I think one of the areas where the insurers have certainly tried to assist and they’ve actually built building calculators and insurance content calculators to assist the client in ensuring that they are correctly reflecting the sum insured of their contents and their building.
So, the important lesson here is to consult your broker, do a proper needs analysis to ensure that your replacement values are at today’s prices.
Absolutely, you don’t want to be left out in the cold when it’s time to claim and really, your broker is there to make sure that any issue that you have is solved upfront, so you don’t have a problem at the time of the claim.
