The average middle-income family accumulates a range of assets and personal belongings over a lifetime.
Beginning with items of the highest value we can list houses, motor vehicles, household appliances, sporting equipment and “basic needs” items such as clothing and other accessories. In a perfect world we would only have to replace these assets in the event of accidental damage or old age. Unfortunately this scenario is overturned by a variety of 21st-century risks.
Risk is defined as the potential that a chosen action or activity (including inaction) will lead to a loss or other undesirable outcome. Your assets and personal goods are at risk from any number of unplanned and unforeseen events. Houses can be destroyed by fire, subsidence, quakes and other natural disasters.
Motor vehicles can be stolen, hi-jacked or damaged by hailstorms or in an accident. And personal goods can be destroyed in house fires or floods, stolen during housebreakings or damaged through personal neglect or abuse. Ironically, the decision not to insure — a choice of inaction — ranks right up there with the more conventional risks.
The best way to safeguard your assets and personal effects against all risks is to purchase short-term personal lines insurance cover. Insurance companies offer a range of products that aim to restore you to the same (or similar) overall financial position after loss, with conditions of course. A typical comprehensive short-term insurance policy might contain homeowner’s insurance (to compensate for structural damage or total loss of your house), household insurance (for the personal goods typically stored within your home) and motor vehicle insurance.
You can never totally mitigate risk, as many insured South Africans have discovered to their detriment. One of the most common mistakes insurance consumers make is to under-insure — when your house or contents are insured for significantly less than the actual replacement value.
If you decided to reduce your cover, the insurer will simply reduce the payout at claims stage. But, if you knowingly understate the value of your insured goods the insurer could reduce your claim accordingly when assessing the loss. That’s why today’s insurance consumer has to match the insured goods replacement value with the value stated on the short-term policy.
“The emphasis for short-term brokers and their clients must be to obtain the correct cover by value at the best possible rate,” says Mandy Barrett of risk solutions and insurance brokers Aon South Africa. “This involves examining your personal insurance portfolio to ensure it meets all of your needs before tweaking it accordingly.”
Christelle Fourie, managing director of MUA Insurance Acceptances, illustrates the risk of under-insurance using a real-life example. One of the group’s clients lost a thatch- roof home to fire recently. Although the house was insured, the homeowner had decided to reduce its insured value. Two years prior to the loss a professional valuator was sent to the property to provide a thorough assessment of what it would cost to rebuild the home in the event of total loss.
The homeowner, a builder by trade, believed he could rebuild the property for less than the valuator determined and subsequently requested the R4-million estimate be reduced to R3.3-million. At the same time the owner reduced household- contents from an initial R2-million to R1.7-million by excluding certain high-value sentimental items. At the claims stage he ended up with R1-million less than he would have had if the original valuations had been left unaltered.
“If you go to the trouble of having a valuation done then you should accept the valuation that comes back,” says Fourie. “One of the most frequent complaints I receive from clients is that they believe the value on their building is overstated.”
Reducing replacement valuations is common in an industry in which clients will do anything to bring down their monthly insurance premium, but clients who believe they can get a builder for less per square metre than the insurer estimate are in for a shock. The amount they receive at claims-payout stage is typically far less than is adequate to replace the house.
Another important consideration when concluding your homeowners insurance is that the market value of a property does not represent the cost of rebuilding it. Your house should be insured for the cost of rebuilding all structures entirely from scratch. “If you are insuring at market value –the cost of buying or selling the property — you are insuring incorrectly,” says Shirley Burger, national head of claims at Alexander Forbes Insurance.
Homes that are insured at market value are likely to be underinsured during times of house-price weakness, because during a weak property market the cost of rebuilding a house is often higher than its market value and vice versa. By insuring at market value, you will either be paying too much in monthly short-term premium, as a result of being over-insured, or you will be under-insured and suffer a reduced settlement at the claims stage.
There are a number of steps you can take to ensure the best possible risk management of your short-term insurance portfolio. Clients can reduce their monthly short-term insurance premium by accepting bigger excesses on cover, excluding certain items that have great sentimental value but cannot easily be replaced, and combining householders and motor insurance.
You should also revalue your insured portfolios every 12 months, with an emphasis on buying cover for the replacement value of the goods insured. Further reductions can be secured by upgrading alarm systems and security, thus presenting a different case to the underwriter for rates to be lowered.
“It helps to review the tried and tested options from a different perspective, that of risk management, which, after all, is not the domain of the commercial client alone,” says Barrett. “If under-insurance is the danger, risk management is the solution, and that’s where broker intervention is so invaluable.”
An insurance broker offers a valuable service in mitigating your personal risk by contributing meaningfully at each stage of the short-term product lifecycle. Their service extends way beyond the advice stage (where they assist you in selecting an insurer and placing all of your personal items on cover at the correct value) to the annual review (to ensure ongoing cover is maintained at appropriate levels) and on to the claims stage (where they act as an indispensable point of contact between you and the insurer).