INSURANCE: Fluctuating Rand Plays Havoc with Insured Values
Recent Gauteng Business News
The falling Rand may be a blessing to exporters in our country but for those importing, it clearly drives up the cost of the goods imported. From an insurance point of view it is important for insured parties to assess the potential impact the falling rand may have on the insured value of their property and assets, and in particular, the cost to replace machinery or equipment procured overseas.
This is according to David Stratton, Strategic Account Manager at Aon South Africa.
Since the middle of 2012 the rand has lost significant value against the three major currencies namely the US Dollar at over 18%, the Euro at 23% and the pound at 17%. Any manufacturing operation which uses imported plant and machinery will see the replacement cost of such equipment increase by roughly the percentages noted above, depending on the currency in which it is purchased. Assuming a claim occurred now against a policy which incepted in July 2012, and plant had to be replaced from a supplier in Europe, the current rand value would therefore be at least 23% higher than its rand value at inception. When you factor in inflation, that figure is closer to 30%, he explains.
Other potential impacts could be felt if stock or raw materials are imported. These values would also be higher in Rands than at inception. Even building values may contain a significant amount of imported content and this too should be considered. In these scenarios it soon becomes very evident just how important it is to insure properly against such losses, which could see you underinsured by as much as a third in the event of a loss or claim.
It comes down to thoroughly understanding your policy covers and consulting with a professional broker to navigate your way through the minefield of jargon and exclusions. Many policies will have a clause dealing with Escalation due to Currency Fluctuations, where the insurer will allow for changes in the rands value over the course of the policy period. However, this clause is usually subject to a limit stated in percentage terms, and specified in the policy schedule.
Other policies may be arranged on a Day 1 Average basis, average referring to the insurance term dealing with under-insurance in the event of a claim. In such cases the value at the inception date is not challenged when there are currency fluctuations but can be challenged in the event that it was inadequate in the first place. However, this too can be limited to a specified percentage, adds David.
In the absence of either of these clauses it is important to be aware of the impact that the change in the rand either negative or positive might have on your insured values. In this regard it is often worthwhile to have a professional valuation carried out on buildings and plant. In addition to having these assets correctly valued in a baseline valuation it is also possible for the valuators to calculate the imported content of your insured values, which will enable you to assess the potential impact a currency fluctuation may have.
And its not just businesses and commercial entities that are impacted by the Rands falling value. Personal insurances are not immune to the risks of currency fluctuation either and in fact in the personal lines space, under-insurance is perhaps more commonplace. Many house holders policies have an automatic inflation margin built in which increases the insured value automatically. However, this is done at a specified percentage and is driven by inflation rather than currency fluctuations. If the insured value under your personal policy includes items which are imported, and whose replacement prices would be impacted by a fall in the rand, you may need to adjust the insured value further to take care of this exposure.
Whether youre a commercial business entity, or an individual, its essential that you dont fall into the trap of just adding the prevailing inflation rate to asset values. Building costs continue to increase at a significantly higher rate than CPIX inflation, while depreciation and the falling Rand value hold significant implications for insured asset values, especially where imported goods are involved. Safe guard your assets and your ability to recover successfully from a significant set back by consulting with a professional risk advisor who can assess your specific requirements through a thorough needs analysis, concludes David.
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