Guard against under-insurance in wake of weather catastrophes

Many global communities are exposed to increasingly volatile weather conditions that are in part enhanced by the growing effects of climate change. This includes record-setting episodes of extreme temperatures, rainfall and flooding, droughts and wildfires, rapidly intensifying tropical cyclones and late season severe convective storms.  Aon’s 2021 Weather, Climate and Catastrophe Insight reportevaluates the increasing frequency and severity of disruptive natural disasters and their resulting economic losses, which includes three notable events in South Africa – Cyclone Eloise in January 2021 ($90+ million), floods ($75 million) and wildfires in the Western Cape in April 2021 ($100+ million). 

“Clearly there is both a protection and innovation gap when it comes to climate risk. How we assess and ultimately prepare for these risks cannot solely depend on historical data. As Aon, we look to technology like artificial intelligence and predictive models that are constantly learning and evolving to map the volatility of a changing climate and what this means for insurance and risk mitigation for your assets and livelihood. The bottom line is that we need to help our clients make better decisions that make them more resilient as they continue to more frequently face increasingly volatile weather catastrophe risks that threaten businesses and homes," explains Mandy Barrett of risk consultants and insurance brokerage, Aon South Africa.  

Over the last few weeks, South Africa has been battered by unprecedented rainfall thunderstorms causing flash flooding, severe crop damage and even a tragic loss of life, with the National Disaster Management Centre (NDMC) declaring a National Disaster. Many districts across six of the country’s nine provinces experienced the most rainfall on record since tracking by district began in 1921.The spotlight is firmly on the affect that climate change is having on weather patterns around the world and the fact that catastrophe events are becoming more erratic - heavy rains are also expected to continue this season because of La Niña, which affects ocean currents and usually results in above average rainfall in southern Africa.

“These weather events have significant implications for how people approach their insurance planning in the face of a worst-case scenario. In the event of a severe weather event such as a flood, fire or tornado, you are likely to experience a severe loss scenario, potentially having to replace all your household contents and in a worst-case scenario, possibly the entire structure of your home or even your motor vehicle.  In a severe or total loss scenario, finding yourself under-insured can prove to be financially devastating, so extra attention needs to be paid as to how robust your insurance planning and coverage is to cater for such an event,” says Mandy.    

This comes at a time when many South Africans are still reeling from the financial implications of the COVID-19 pandemic, where many households have had to cut costs to keep their heads above water. “While there is always the temptation to cut insurance costs in a bid to save money, the better approach would be to review covers with your broker and right-size them to achieve better rates and cover. Major assets such as cars and homes are often not correctly insured which is a real concern.  If this is the case, you may discover that you are only partially covered because of what insurers call the application of the ‘average formula’ at claims stage,” Mandy explains. 

The average formula explained

Example 1
You insured your household contents for R250 000, but the actual replacement value is perhaps double that amount, leaving you effectively 50% under-insured.  If you suffer an outright loss of all your insured contents – R250 000 - the insurance company may pay only 50% of the claim at R125 000, leaving you out of pocket for the balance of R125 000 due to you being underinsured for the actual replacement value of your contents.

Example 2
You bought your home ten years ago for R500 000. As building costs increase, the replacement cost - not the market value which is a different thing altogether - has appreciated to around R1.5m, meaning that your home may be under-insured by as much as R1m.  If your roof should collapse due to a tornado or catastrophic storm, at a replacement cost of R900 000, your insurance may only pay R30 000 – as you are under-insured by 60% of your homes actual replacement value.

“When evaluating a claim, it is often found that homeowners and motor vehicle insurance values are 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 in a bid to reduce their premium costs. We have also seen scenarios where homeowners have settled their bonds with the bank and did not realise that their bank-provided building insurance linked to their bond account, which was not reinstated after closing their loan account. These scenarios could leave you permanently financially compromised in the event of a severe or outright loss,” Mandy illustrates.

Paying the right price for the right amount of cover

It’s perfectly possible to save sensibly on insurance premiums without exposing yourself to crippling uninsured losses. Aon provides the following tips to ensure that you’re paying the right price for the right amount of cover:

• Accept a bigger excess (the first amount you would pay on a claim), valuing accurately and excluding certain items.  Another suggestion is to accept a risk in its entirety, in other words not to insure at all, an item which is readily replaceable or stands very little likelihood of being damaged, lost or stolen. Caveat emptor – be circumspect as to what you exclude here and consult with your professional broker for guidance and advice of what will work for your particular circumstances.
• Consolidate your household and motor insurance with one insurer. Not only could it reduce your premium, but you will also save on debit order fees and policy administration charges. 
• Install a good alarm system or upgrade your security in general, allowing you to receive discounts on your premium from underwriters who recognise that claims are less likely to arise when security risks are addressed.
• Insure your property accurately for replacement cost – that is the cost to replace your asset at TODAY’sprices and not what you bought it for - avoiding the trap of lowering your cover due to market value fluctuations in the current property market space. 
• Your broker will provide advice on the selection of cover and understanding of policy terms and conditions, but always read the fine print.
• Remember to inform your broker of any change of address or improvements to your home, such as putting in a new security system or extensions to your home, which will impact the insured value.
• Always insure adequately where big ticket items are involved, notably motor vehicles that are subject to risk both on the road and in your residential premises.  Always opt to insure your vehicle for retail value and remember to nominate additional drivers who may need to use the vehicle, as some insurers will reject an accident claim if the driver is not nominated. 

“When it comes to making better decisions about your insurance cover, it makes sense to discuss the matter with your insurance broker who is able to provide you with impartial insights and data, in order to guide your choices. While insurance is often seen as a grudge purchase, it is important to plan and save for the future and this goes hand-in-hand with a well-managed insurance game plan that meets your basic protection needs, suits your pocket and sees to it that your assets are protected and secured for whatever the future may bring.  When planning your insurance portfolio be reminded of the following - Insurance may be temporary, but without it, in your time of need, your problem becomes permanent. It remains the most affordable and best means of making certain provision for the unpredictable,” Mandy concludes.