Does your cover meet the new inflation test?

5 May 2008

Rising inflation doesn't only put pressure on the Reserve Bank - it also tests short-term insurance cover. Macro factors like inflation and rising import costs on the back of a weaker Rand can drive up replacement values of many household items, from audio equipment to furniture and appliances.

Yet many policyholders fail to realise that macro pressures increase the risk of under-insurance, warns leading short-term insurer, Mutual & Federal.

Merrick Oeschger, Executive General Manager: Business Development and Sales, says there is a high risk of a slow consumer response to the under-insurance risk as years of relatively low macro pressure may create false expectations of price stability.

“After 2001, the rand strengthened and currency stability ensued," he explains. "In addition, the authorities enjoyed major success in keeping inflation within the targeted 3-6% range. But recently CPIX topped 9% for the first time since 2003 and the rand is again at record lows against major currencies.

“Developments like these increase the likelihood that a policyholder will not be able to replace stolen or damaged items for anything close to the purchase price of three or four years ago.

“The result is a growing gap between insured values and replacement values. In effect, the individual takes personal responsibility for covering that gap. It can come as an unpleasant surprise when the extent of this risk is revealed through a burglary, fire or storm damage.”

A simple example illustrates the trap. Premiums might provide R100,000 in cover, but the current replacement value might be R200,000. In the event of a claim, an insurer is only obliged to make pro-rata restitution - in this case, meeting only half of the claim.

Merrick Oeschger adds: “With major claims, it can be a devastating blow when families realise they have to make good the uncovered portion of the loss from their own pocket.”

There is a simple and effective solution - call in a professional short-term insurance adviser to carry out a thorough review of replacement values.

“With inflation on the rise, there's no better time,” says Oeschger. “You could be surprised at the gap that has opened up and the risks you have been running because of the mismatch between real replacement values and the cover set down in your policy.”