Explore how the depreciation of the rand affects insurance costs and the importance of ensuring adequate coverage in a fluctuating economy.
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Times are tough, geopolitical tensions are high in global markets, and South Africa is not immune. Continued pressure on- and depreciation of the rand – largely due to factors outside of our control – fuel fears and add financial strain to a struggling economy, which already needs to deal with successive VAT increases over the next two years.
These developments have an impact on all business sectors, including the insurance industry. This is according to Ryno de Kock, head of distribution at PSG Insure, who unpacks how rand volatility and depreciation could be impacting your insurance cover, both from a business and personal insurance cover perspective.
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,” says de Kock.
Don’t skimp on adequate cover
While this is not good news for households and businesses already under pressure, it is crucial not to cut corners on financial protection. “Global development aside, your home or business still has the same risks they did 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,” he says.
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.
Review your situation
Have a look around your house, or your business. How many items are imported, and what will it cost to replace these if they must 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 rapidly 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 R200 000 but would now cost R220 000 to replace. Additionally, the increased cost of importing vehicle parts is another consideration.
As de Kock suggests, “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.”
Stay covered
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 is invaluable.
If you are unsure about your current level of cover or the replacement values accounted for in your policy, speak to your 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 – such as every six months or whenever you acquire something new that would increase the cover you need,” de Kock says.
PERSONAL FINANCE