The threat of rising inflation is sending a reminder to the homeowners of South Africa that replacement values of many appliances and items of furniture will soon be going up, making it vital that short-term insurance policies be reviewed.
The main danger is that policyholders who fail to carry out a review could find themselves under-insured should they make a claim against their insurance. Premiums are based on the sum insured. This amount reflects the total replacement value of household contents. The sum changes over time. Two principal factors affect values — inflation and the “wealth effect” (as families add to their possessions).
Inflation has been coming down in recent years, falling from double digits to 3% at one stage. At the same time, a stronger rand reduced the price of imported goods.
In the days when inflation was significantly above 10%, prudent families were in the habit of carrying out a periodic review of insured values and in this way guarded against under-insurance. Unfortunately, the review habit has fallen away. The current threat of a rise in inflation is a reminder that it’s time for another look at those replacement values. Without proper insurance provision, the householder faces the risk that a claim may not be met in full.
It is easy to fall into the under-insurance trap. A family simply assume that cover is adequate and continue to pay the old level of premiums without realising that replacement values have gone up or that significant additions have been made to their household possessions.
Cover of perhaps R250 000 may have been adequate a few years ago, but today might have to be as high as R500 000 to cover full replacement.
In cases of under-insurance, the insurance companies apply a simple formula. They make proportional recompense based on the amount of cover provided by the premiums.
If the premiums were calculated to provide cover for a R250 000 claim and the true risk exposure was R500 000, then the insurer is quite entitled to meet just half of any claim.
As long as the family home is not affected by fire, flood or some other disaster — including a burglary — all goes well. But when disaster strikes and a claim has to be made, the effects of under-insurance become clear.
In order to assist policyholders to make provision for a possible increase in cover required, insurers often increase policy sums insured at the beginning of each year. Although this adjustment provides some increased cover, the increase is based on a very generalised and broad assumption made by insurers and might not be efficient for the specific needs of each policyholder. It is therefore essential to periodically review your insured values.
The easiest defence against under-insurance is to undertake a regular review of household contents in consultation with a broker. If there has been no review for several years, you will be surprised at the difference in values between “then” and “now”.
Go through every room in the house and list all the furniture and appliances. Then make a careful estimate of the new replacement value of each item. Add up all the items. The total amount is the sum that should be insured.
While carrying out a review, it is often advisable to revisit the all-risks section of the policy. This section covers items of value that are taken out of the home or worn — items such as jewellery, video cameras, laptops and cellphones.
Easily portable possessions are not covered in a standard household contents policy while away from the house. To ensure that such items are covered when taken from the house, they have to be specifically listed in the all-risks section. If they are not on the specified list, they are not covered for insurance.
For example, if jewellery is snatched on the street or a laptop is stolen from a car in a smash-and-grab attack, no claim can be made against the insurer if these items are not listed in the all-risks section.
Make a point of listing any new “portable” possessions in the all-risks section. That way you are covered for their loss.
The only way to achieve 100% peace of mind is to carry out a regular review of replacement values and the items on the all-risks list.
Merrick Oeschger is executive general manager: personal business at Mutual & Federal