How rand depreciation affects your insurance cover
By Bertus Visser, Head of Distribution, PSG Insure
Times are tough in markets across the globe, and South Africa is no exception. To make matters worse, continued pressure on the rand – largely due to factors outside South Africa’s control – is fuelling inflation fears and adding pressure to an already struggling economy.
This affects all business sectors, including the insurance industry.
A weaker rand means imported goods cost more
Most consumer goods in South Africa – including cars, electronic devices and household appliances – are imported. A weaker rand means that all these items cost more – which in turn means that their replacement values increase. Insurance companies are likely to experience higher claim values as the rand depreciates and may in time have to increase insurance premiums to cover these.
Don’t skimp on adequate cover
While this is not good news for households and businesses already under pressure in a struggling economy, it is crucial not to cut corners on your insurance cover. Your home or business still faces the same risks as before. But the consequences of a loss that is inadequately covered by your policy will be more severe now. As the replacement costs of goods increase, it becomes more difficult – and in many cases impossible – to cover shortfalls out of your own pocket.
Therefore, it is important to bear the impact of the depreciating rand in mind when reviewing your premiums and evaluating whether your cover is sufficient.
Survey your situation
Take a look around your house, or your business. How many items are imported, and what will it cost to replace these if they have to be replaced with a weaker rand? First on your list at home is probably your flat screen TV, followed by your laptop and cell phone – but if you look more carefully, you’ll find that almost every item would be more expensive to replace due to the weaker rand.
At your business, the most obviously affected items will be trading stock, electronics and specialised machinery. The increasing cost of imported stock as the currency declines can be catastrophic for your business if you don’t have contingency plans in place.
Calculate your costs
Let’s consider how a 10% decrease in the rand affects your insurance. Perhaps the estimated value of the home electronics included in your home contents insurance is around R100 000, but would now cost R110 000 to replace. The car that cost R500 000 when you bought it would need to be replaced at R550 000. In fact, almost all replacement parts for cars are imported, so even a relatively small car claim is going to cost more now than it did before. Who is going to cover the shortfall?
The best way to protect yourself – or your business – is with a carefully thought through insurance plan that covers you at the full, present-day replacement cost of any items that may be lost or damaged.
Most of us don’t monitor the exchange rate daily, and it’s only one of the many factors that could impact the adequacy of the insurance cover we have in place. This is where the expertise of a qualified short-term insurance adviser becomes invaluable. If you are unsure about your current level of cover or the replacement values accounted for in your policy, speak to you adviser and give yourself that additional peace of mind. Remember that you don’t need to wait for your annual policy review to update your insured value and can do so more regularly (e.g. every six months).
Claire Densham Communications
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