Thursday, 06 August 2020

Exchange rates have implications for your motor and household insurance

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The Rand’s rapid fall against the US Dollar has serious implications for consumers when it comes to the sums insured on motor and household insurance policies.  South Africa’s volatile exchange rate has been exacerbated by the Covid-19 pandemic, as well as substantial outflows from the South African bond and equity markets due to SA’s sovereign credit rating downgrades.

According to Mandy Barrett of insurance brokerage and risk advisors, Aon South Africa, the knock-on effect of the Rand’s depreciation on insured sums is quite profound.  “The replacement costs on imported car parts and imported goods inevitably skyrockets. It’s important for consumers to assess the potential impact that the falling Rand may have on the insured value of their property, and in particular, the cost to replace equipment, parts and items that are imported. In the current scenario, the actual replacement value of items in your home and repairs on your vehicle could very easily outstrip the values that you are insured for,” says Mandy.

Your designer SMEG kitchen, imported audio-visual equipment, designer furniture, apparel, clothing, smart devices and motor vehicle all come with much heftier price tags today than they did a year or two ago.  

“If you are under-insured in the event of a loss, you may however find yourself in a situation where you are paid partially for a loss at claims stage due to the average formula being applied - which means that if your property or vehicle is under-insured by 40%, for example, then you may only be paid 60% of your claim, regardless of whether it is a partial or total loss,” explains Mandy. 

“Given the current circumstances, it’s important to check and ensure that you are correctly insured for the actual replacement cost of your most important assets, at today’s prices.  The cost to replace your home, contents and vehicle at today’s prices could have appreciated well beyond your insurance cover,” Mandy adds.

Given their significance in our lives, it’s really important to make sure that your car is correctly and comprehensively insured. A key issue on vehicle insurance is the ‘Basis of Loss Settlement’ in policy documents. “Policy wording differs in this respect,” says Mandy, “But the crux of the issue is the values used in defining this basis, notably retail and market value.  Retail value is the price at which the dealer will sell a second-hand vehicle to you. Market value is the average of the difference in price between retail value and its trade-in value, in other words what you could expect to receive from a dealer, were you to trade the vehicle in. Insuring your vehicle for retail value will enable you to bounce back financially by allowing you to replace like for like, should anything happen.”

The Covid-19 pandemic has also brought tremendous pressure to bear both on consumers and on businesses, especially those that rely on imported goods and components. For example, one of the major impacts of the pandemic is that vehicle repair costs have gone up significantly due to a shortage of spares and parts as imports are restricted, currency exchange rates are on a rollercoaster ride and restrictions on repair shops to operate during the lockdown also add to the motor vehicle repair industry’s woes.

These factors delay repairs and extend the time that it takes to repair a vehicle.  “Having an accident has the potential to turn your life upside down as you simply cannot afford to be left stranded without transport while your vehicle is being repaired.  As a result, we recommend that you purchase car hire cover following an accident to a minimum of 30 days to allow for time to source parts and repair,” says Mandy.

“We are operating in anything but normal times, and for the foreseeable short to medium term, our economy and exchange rates are going to be heavily impacted. Consult with your broker who will perform an insurance needs analysis to establish replacement values at today’s prices, and if necessary, arrange for a professional valuation of your assets to ensure that you are not under-insured.  A professional broker will confirm exactly what you are covered for and whether any exclusions or special conditions exist on your policy - an area that most people are unaware of.  As tough as times are right now, it’s vitally important to take care of your most valuable assets in the event of major catastrophe and ensure that you are not financially compromised if things do go wrong,” Mandy concludes.