High Inflation is Leading to Under-pricing and Underinsurance

Photo by Towfiqu barbhuiya | Unsplash

A confluence of events, such as pandemic-related restrictions, supply chain disruptions, labour shortages, fuel price increases, currency devaluations, and the war in Ukraine, have contributed to inflation, which has led to a significant rise in construction costs. 

How does inflation affect insurance? An increase in inflation can contribute to a hard market because goods become more expensive, and money does not go as far as it used to. 

For example: 

1. Greater rebuild costs.  

If you have building insurance, rebuilding costs (residential or commercial) will likely increase due to rising material costs and labour shortages. The rebuild cost should be reflected on your policy’s sum insured.  

Many policies are index-linked to reflect changing prices automatically. However, if the sums insured were incorrect when you took out the policy, they will remain incorrect. 

Therefore, policyholders must accurately calculate their sum insured by adding the repair cost to the rebuild value (e.g., debris removal, surveyors, architects etc.) It’s equally important that you don’t over-insure, otherwise you’ll pay a higher premium for coverage you don’t need. 

2. Claims Inflation. 

This represents the claim cost increase based on materials, goods, and services. Settlement costs are also affected by the same factors that drive inflation. For instance, repairs will be more expensive if labour parts costs rise. 

Our decisions are affected by volatile consumer and financial markets, primarily due to rising living costs. Not insuring our belongings, property or business assets may seem like a worthwhile risk when looking to save some money. However, it is important to remember that insurance serves as a safety net for unexpected financial hardships. Compromising on cover, or going without, means bearing the reinstatement costs yourself if something goes wrong. 

In the absence of any immediate end to inflationary pressures globally, there is a risk that clients will become unintentionally underinsured. Replacement values should be carefully considered when declaring insurance coverage for buildings, stock, plant and machinery. Reassessing timeframes for business interruptions is also vital because raw material delays have extended construction deadlines. 

Considering that all property insurance policies are subject to Average, an underinsured company can suffer devastating financial consequences. A recent instance of this was in KwaZulu Natal, with the riots and floods. The shortfall in insurance payments resulted in clients being uninsured for a portion of their risk, straining businesses financially at a time when they were most vulnerable. 

Consider how inflation may impact your property insurance. Then, look at how you can cover the exposures that may result. Make sure you’re not underinsured by understanding your options. 

Understand Replacement Cost. Several factors contribute to the effect of inflation on property insurance rates and coverage. It has been shown that inflation and home replacement costs are correlated. Materials and labour costs rise as a result of inflation. Therefore, the cost of replacing a home will also increase. When your property insurance policy only covers R500 000, but you need R 1 000 000 coverage, you cannot file a claim. This necessitates upgrading the coverage limit or adding additional endorsements. 

Consider Your Current Coverage. Taking a close look at your current property insurance policy and its coverage limits can help you determine whether you’re underinsured. In the event that inflation has significantly impacted your business, it may be time to consider whether additional coverage is needed. Depending on whether your current insurance policy covers the costs of replacing your home, construction costs could be high. 

Research Additional Options. If inflation has left you underinsured, bridging the gap between your current coverage and what you need will be challenging. Generally, there are two options: guaranteed replacement cost coverage or extended replacement cost coverage. Though these cost a higher monthly premium, you will have higher coverage levels should you have to file a replacement claim. However, several options exist, such as adding an endorsement. 

CC&A employs licensed quantity surveyors registered with the SA Council for Quantity Surveyors. Who are capable of providing accurate insurance replacement valuations for personal and commercial property to clients.