Having a solid understanding of the implications of underinsurance is crucial at a time when many South Africans are financially strained and looking for ways to save on household costs. While there is always the temptation to cut insurance costs in a bid to save money, the right approach is to review covers with your broker and right-size them to achieve better rates and cover, without exposing yourself to the risk of uninsured losses which could prove financially crippling.
“In the event of a severe weather event such as a flood, fire or tornado – of which South Africa has experienced many recently - you’ll most likely have to replace all your household contents and possibly even the entire structure, and that’s notwithstanding the fact that South Africans are more exposed to loss from the likes of crime, burglary and vehicle claims including car hijacking and theft,” says Mandy Barrett of risk consultants and insurance brokerage, Aon South Africa.
In terms of catastrophic losses, the Knysna fires of 2017 gutted 600 homes, displaced more than 10 000 people and tallied insured damages in excess of R4billion. It was reported that more than half of the formal homes affected by the Knysna fires were not insured. In many instances, properties were under-insured for the replacement costs of the buildings and assets at today’s prices, having not revisited the insured sums since inception of their policy. Some who had settled their bonds had neglected to reinstate their buildings insurance after closing their bond accounts. Many who suffered uninsured losses will take years, if ever, to recover from an outright loss of their single biggest asset.
“More recently, severe flooding, wildfires, drought and tornados have become frequent occurrences across South Africa, with climate change leading to charge in catastrophic losses. Most of all, these uncontrollable events highlight the folly in assuming that worst case scenarios are simply too unlikely to happen. Major assets such as cars and homes are often not properly insured which is a real concern. If this is the case, you may discover that you are only partially covered because of what insurers call the ‘average formula’ at claims stage,” explains Mandy.
The average formula explained
You insured your household contents for R250 000, but the replacement value is perhaps double that amount, leaving you effectively 50% under-insured. If a storm blows in and you suffer a loss of R50 000, the insurance company may pay only 50% of the claim at R25 000, leaving you out of pocket for the balance of R25 000.
You bought your home ten years ago for R500 000. As building costs increase, the replacement cost - not the market value which is a different thing altogether - has appreciated to around R1.5m, meaning that your home may be under-insured by as much as R1m. If your roof should collapse due to a tornado or catastrophic storm, at a replacement cost of R60 000, your insurance may pay, only R20 000.
“An alarming aside is that property owners who pledge their homes as security for loans are in danger of having to honour those loans out of their own pocket should they be under-insured and suffer a major loss. Ironically, people will often insure their cell phones before they make sure that their house is properly covered. If your home burned down, it is probably highly unlikely that you would have enough money in your savings to rebuild it, replace all your household contents such as furniture, appliances and clothes and maintain your standard of living,” Mandy adds.
Often insurance is seen as a grudge purchase, however what most people don’t think about is that planning and saving for the future depends heavily on having a well-managed insurance plan in place that meets your basic protection needs right now, and sees to it that your assets are protected and secured for the future.
Paying the right price for the right amount of cover
It’s perfectly 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 cover:
Accept a bigger excess (the first amount you would pay on a claim), valuing accurately and excluding certain items. Another suggestion is to accept a risk in its entirety, in other words not to insure at all, an item which is readily replaceable or stands very little likelihood of being damaged, lost or stolen.
Consolidate your household and motor insurance with one insurer. Not only could it reduce your premium, but you will also save on debit order fees and policy administration charges.
Install a good alarm system or upgrade your security in general, allowing you to receive discounts on your premium from underwriters who recognise that claims are less likely to arise when security risks are addressed.
Insure your property accurately for replacement cost, avoiding the trap of lowering your cover due to market value fluctuations in the current property market space.
Your broker will provide advice on the selection of cover and understanding of policy terms and conditions, but always read the fine print.
Remember to inform your broker of any change of address or improvements to your home, such as putting in a new security system.
Always insure adequately where big ticket items are involved, notably motor vehicles that are subject to risk both on the road and in your residential premises. Always opt to insure your vehicle for retail value and remember to nominate additional drivers who may need to use the vehicle, as some insurers will 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.