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Statistics indicate that an enormous number of South Africans are underinsured. This is often the result of consumers being uninformed in terms of replacement values and therefore being caught unawares when needing to make a claim. Financial constraints resulting from the worldwide economic ‘pinch’ also play a role.

When consumers make the decision to insure their household contents, many do so without considering how much it will cost them to replace their asset. Depreciation and rising inflation erode the value of goods from the moment they are purchased and cognisance therefore needs to be taken of this in order to ensure that one has adequate replacement cover in place.

“People simply don’t keep track of inflation and the effect this has on the value of their assets,” says Arnold van der Linde, chief executive officer at the IntegriSure Insurance Group of companies, an authorised financial services provider offering specialised short-term insurance and other products for niche markets, “and often find themselves unable to replace a particular item with one of similar value and quality when they’ve suffered a loss.”

For example, household contents insured for R150 000 five years ago would probably now have a replacement value of close to R300 000. The insurance payout amount would thus be calculated as follows:

The final payout figure will be half that of the claim amount due to the fact that the claimant is 50% underinsured.

Consumers may, however, also make an intentional decision to underinsure. It may be that it is simply too expensive for them to insure their assets at full replacement value, the rationale being that some form of payout is better than no payout at all. Others choose to take the ‘partial damage or loss’ approach, the rationale in this case being that the total loss of all their household contents is unlikely.

It is clear that macro-economic issues increase the risk of being underinsured, and not only in terms of affordability. There is a direct link between poverty and crime and tough economic conditions result in an increase in both. The likelihood of experiencing some form of related asset loss is therefore that much greater.

“Always bear in mind that there is a difference between insured and replacement value,” concludes van der Linde. “Paying that little bit extra each month to compensate for this is a far better option than not being able to replace a much needed household goods item.”