Inflation and Short Term Insurance Premium

Inflation is an ugly beast. In South Africa we saw the inflation rate increasing steadily during the year in 2008. The results were very damaging to the economy as a whole and certainly affected every one of us as we saw prices of everything go up. With the rising inflation rate we also had to put up with huge hikes in the price of fuel, electricity and interest rates. The value of the rand also depreciated against the other major currencies since the credit crisis in the USA. Short-term premiums are no exception when it comes to the increase in the inflation rate.

Inflation and car insurance

Whilst it is true that inflation affects short-term insurance you need to take note of the following facts: When you take out car insurance it is calculated on the value of your car at the time. But cars loose value very quickly and if you do not adjust your car insurance amount you will be paying too much insurance year after year.

A few years ago we started importing a number of cheaper cars. The problem is that the spare parts must also be imported. Often there seems to be no relation between the value of the car and its spare parts, something you should keep in mind when buying an imported car. The fact remains, the cost of spare parts and repair work has increased dramatically, pushing up the price of insurance. Inflation is also only one of the factors that influence the price of insurance. The number and amount of claims an insurance company must handle plays a much bigger role in the pricing of insurance.

Household contents insurance

Usually you will find that your content insurance value, and therefore the premium, is adjusted every year to accommodate for the rise in the inflation rate. Remember that with household content you are dealing with a different rule – household content is insured at replacement value (also called new for old) and not current market value. This means that should you claim against your household content insurance for items stolen or lost, you will receive new items as replacements; that is if you were not under-insured!

Rising inflation and a lower rand push up the prices of imported items even further. Just have a look around your house and see how much of your valuable items are actually imported. The likelihood that your household content is under-insured increases in times like this. When you are under-insured you face the unpleasant surprise of the average clause being applied when you claim, whereby you will only receive a pro-rata payment based on the amount you were under-insured for.

What must I do?

The best is to call in a professional short-term insurance adviser to do a proper review of the replacement values of your household content. You could do it yourself but it will be time-consuming and you may not get it right. Always guard against under-insurance, the results can be very damaging to your finances. Once you have established a proper value you need to re-evaluate the situation on an annual basis.

But I have down-scaled

If you have moved from a four bedroom house to a two bedroom flat and got rid of many of your furniture you may well be over-insured. This also carries no benefit; so again, check your current insurance value. On the other hand, you may have bought all new furniture and electronic gadgets and find that you actually need to increase your insurance!

What about my house?

Inflation has also affected the building industry very badly; in 2008 the price of steel alone rose very steeply. Your house must also be insured at replacement cost; if it burns down to the ground it must be replaced at today’s prices. The insurance company will increase your insurance yearly to make provision for the inflation rate. Again, there is no harm in you checking the figures and querying your homeowner’s insurance value to make sure that you are neither under- nor over insured.

We have seen a drop in interest rates since December 2008, let’s hope the inflation rate will also drop and we can all reap the benefits.