I hope you don’t mind my asking, but:
Is the new flatscreen Telly you got for Christmas really that much better than the old one?
Didn’t get a flatscreen for Christmas…?
What about that Garmin? Is it really easier to use than my map book?
Didn’t get a Garmin either?
Join the boat…All I got was two pairs of shorts – one of which still has the Woolworth’s security tag firmly attached – resulting in a few odd stares when I’m out and about. But hey, it’s the thought that counts, right?
(The reason I’m asking all these questions is because I’d like to get a flatscreen too. The problem is that I don’t watch much television, so I’m thinking return on investment!)
The point I’m trying – in a roundabout way – to get to, is that in the Western World Christmas has long been associated with spending, spending, and more spending…with January/February being the perfect time to make sure that all those brand new goodies are insured correctly.
Which brings me to today’s post…but hang on, before we get into the nitty gritty of what to insure your worldly possessions for…
Let’s first take a look at what falls under the contents section of your insurance.
Contents insurance is also referred to as ‘householder’s insurance’.
Our compliance officer has a unique description for this and it goes something like this:
“You know if you turn your home upside down and shake it? Well, all the stuff that falls out is called your contents!”
While this is not totally correct (all risk items will also happen to fall out, as will your wife and kids!), it serves to explain what contents are.
Another interesting thing about contents insurance is that it doesn’t have much in common with the rest of your insurance (besides homeowner’s insurance that is!).
By this I mean that every year you should increase the amount of insurance cover you have in line with replacement value – commonly referred to as the ‘new for old’ basis.
In South Africa – besides death and taxes – the one thing you can bet on is that your washing machine isn’t going to get any cheaper next year.
We all know that your brand new car loses a chunk of value once you drive it off the showroom floor, as does your cellphone, your laptop, your Ipad, your… (Please fill in the blanks).
While the insurers would love to increase the insured value on your vehicle every year in line with new car prices, the cost of doing so would soon make insurance unaffordable for the vast majority of us.
With motor vehicles the solution is simple…
Simply lower your insurance value to book value each and every year! Of course, this doesn’t mean that your car insurance will get any cheaper, since the insurer must charge enough to cover all their claims and overheads.
The only way for them to offer cheaper premiums is by recruiting better clients who don’t claim as often, by reducing overheads, or by not paying claims…so stew on that for a moment!
If you think about it, the same principle should apply to your contents insurance. I mean, who’s going to offer me more than R1, 000 for my five year old fridge? Strictly speaking, shouldn’t I be reducing my contents insurance every year? Well, carry on reading to find out…
Can’t I insure my contents for a ‘first loss’ value nominated by me?
In commercial insurance it’s quite common to insure against theft on a ‘first loss’ basis. What this means is that the insurer will cover theft, but only up to a fixed amount of say, R100, 000. Any loss over and above that is for your own chequebook.
So why isn’t this available to personal insurance policyholders?
The vast majority of claims experienced by an insurance company are on the personal insurance side. The only ‘people’ losing in this deal would be the insurance companies.
Let’s face it, if you ever have a burglary, then its seldom more than a few portable items which are stolen.
Harry’s done well for himself. He owns a lucrative panelbeating business and has over many years bought more and more possessions. At last count, he conservatively estimated that he had over R500, 000 worth of furniture and clothing. The single most expensive item that Harry owns is a flatscreen TV worth R50, 000.
Harry therefore decides only to insure for R50, 000!
When Harry claims he presents an invoice for R50, 000 – and bang – the insurance company takes the knock. The only way Harry can lose in this deal is if his entire home burns to the ground…or if they clean him out while on holiday.
In short, no first loss basis is allowed for personal insurance policy holders, and you can blame Harry for that!
But it’s unfair…I’m insured for R200, 000, I’ve never claimed in ten years, and now they tell me that they’re only going to pay R6, 000 of my R10, 000 claim. I’m insured for way more than I’m claiming!
What can I say…it’s a bitter pill for me to swallow as well (Remember I’m a customer too!).
What’s important to note here is that by underinsuring you’re actually overinsuring!
You’re paying every month for insurance which you’ll never be able to claim against and I’ll explain it below.
Maybe when you originally insured your furniture it was only worth R150, 000. So why insure it for R300, 000 today?
Logic also tells me that if I bought it brand new for R150, 000 five years ago, then it can’t be worth more than R50, 000 today! Shouldn’t I then be reducing my insurance cover?
The problem with this is that, as your insured amounts dropped every year, so too would your premiums. With claims on the increase, and lower premium income for the insurance companies, it would be a one way road to bankruptcy. The insurers would then be forced to charge you more every month for less and less cover until you eventually decided that insurance just wasn’t worth it.
Another problem with insuring for actual value is…how do you place a value on a 10 year old Sealy Posturepedic mattress?
There’s no book value on something like that (although the memories made on that mattress might be priceless! 😳 )
Insurers decided to insure contents (and buildings) on the ‘new for old’ basis.
Of course, it doesn’t help to replace your 10 year old Sealy Posturepedic with a brand new one, when you never ever bother to increase your insurance values.
Think of all the moral hazards…
“Imagine that…After ten years I needed a new bed, so I arranged for the old one to be stolen, and those idiots (read ‘idiots’ as meaning – my fellow policyholders!), get to buy me a brand new one!”
To prevent this the insurance companies invented a little thing called ‘average’.
The sole purpose of average is to discourage policyholders from underinsuring. Basically it means that if you only insure 50% of the replacement value then you carry 50% of the loss!
So by not insuring for the full replacement cost you are creating a loophole which the insurer can – and will – use in order not to pay your full claim.
You may as well give me the R100 every month that you’re spending on cover you’ll never get to enjoy!
Fortunately your insurance company does apply an inflation linked increase to your amount of cover BUT this lulls many of us into a false sense of security.
What you should be doing is taking stock each and every year. Sit down with a pen and paper and record each and every item you own. Then pop in at your local furniture store and put values to these items. Once you’ve ascertained the revised values, get your insurance broker to increase – or decrease – your insurance values!
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Until next time.
The InsuranceFundi Team