Consumers must beware of being underinsured in a time of weather catastrophes as South Africa is no stranger to the devastating losses weather can cause.
After the KwaZulu-Natal flood disaster of April 2022, that the province is still struggling to recover from, the Free-State, Eastern Cape, Limpopo and Mpumalanga were battered by severe rainfall and floods during February, with people evacuated from low-lying and high-risk areas.
At the same time, firefighters in the Western Cape are once again battling runaway fires as temperatures soar and winds bedevil efforts to contain the spread.
According to global professional services firm and insurance broker Aon’s latest 2023 Weather, Climate and Catastrophe Insight report, flooding is the second largest peril across the globe and the most prevalent peril on the African continent, with a devastating economic loss of R1.185 billion.
While the floods of April 2022 were noted as the largest flooding event on the continent with an economic loss of R64.672 billion, what is more concerning is the fact that only 18% of losses were insured, Mandy Barrett of Aon South Africa says.
“Underinsurance remains a key concern in the face of climate risks, especially when it comes to outright and severe losses which typically follow weather catastrophes like flood and fire. This trend is likely to come under increasing strain in a tough economic environment where costs are under scrutiny. The impact of an outright uninsured or even underinsured loss of a home and other assets can have severe financial and personal consequences.”
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“The trend of properties and assets being underinsured for their replacement costs was starkly highlighted in the devastating Knysna fires of 2017 and it is a trend we see continuing as more households face serious financial constraints in the current economy,” Barrett says.
The problem is that many homeowners do not revise the sums insured on their most valuable asset for many years, rendering the cover of these big-ticket items woefully inadequate in the face of an outright loss.
Barrett says another trend is that homeowners who have settled their bond accounts are opting not to insure their buildings in an attempt to cut costs. “Many homeowners who live in security estates reduce cover on their contents on the assumption that they are not at risk for theft or robbery, underestimating other critical risks such as fire and flood.”
Many people do not realise that fire claims are one of the most common large loss claims and most likely to end in an outright or catastrophic loss, with little, if anything, that is salvageable. Similarly, the recent floods have demonstrated how entire homes and everything inside can be swept away or disappear in landslides.
Barrett explains that underinsurance occurs when the insurance cover in terms of sum insured on your policy is not sufficient to cover the full cost of a potential claim and does not reflect the actual replacement value at today’s prices.
“The R500 000 home you bought 20 years ago is likely to be worth five times that amount today to replace. If you are underinsured in the event of a loss, you are essentially taking the risk of the uninsured portion upon yourself. You may be paid partially for any loss at claims stage due to the average formula being applied. It means that if your property is underinsured by 50%, for example, you may only be paid out half of your claim, regardless of whether it is a partial or total loss.”
She gives these examples of how the average formula is applied:
“Homeowners’ values are often understated as the insured sums have not been revisited since the inception of the policy and in some instances, policyholders intentionally undervalue the real value of their assets, including vehicles, to reduce their premium costs. These scenarios could leave you financially compromised in the event of a severe or outright loss,” Barrett says.
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It is possible to save sensibly on insurance premiums without exposing yourself to crippling uninsured losses.
Barrett gives these tips to ensure that you pay the right price for the right amount of cover:
Barrett says navigating the risk of growing weather and climate risks are increasingly leading to severe, if not outright, losses.
“A well-conceived insurance programme is achieved by consulting with an expert broker who can assess your unique needs, risk profile and budget to find an insurance solution that is better able to safeguard your most precious possessions correctly and at the right price.”
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