Having a solid understanding of the implications of underinsurance is crucial at a time when many South Africans are financially strained and looking for ways to save on household costs. While there is always the temptation to cut insurance costs in a bid to save money, the right approach is to review covers with your broker and right-size them to achieve better rates and cover, without exposing yourself to the risk of uninsured losses which could prove financially crippling.

“In the event of a severe weather event such as a flood, fire or tornado – of which South Africa has experienced many recently - you’ll most likely have to replace all your household contents and possibly even the entire structure, and that’s notwithstanding the fact that South Africans are more exposed to loss from the likes of crime, burglary and vehicle claims including car hijacking and theft,” says Mandy Barrett of risk consultants and insurance brokerage, Aon South Africa.

In terms of catastrophic losses, the Knysna fires of 2017 gutted 600 homes, displaced more than 10 000 people and tallied insured damages in excess of R4billion. It was reported that more than half of the formal homes affected by the Knysna fires were not insured. In many instances, properties were under-insured for the replacement costs of the buildings and assets at today’s prices, having not revisited the insured sums since inception of their policy. Some who had settled their bonds had neglected to reinstate their buildings insurance after closing their bond accounts. Many who suffered uninsured losses will take years, if ever, to recover from an outright loss of their single biggest asset.

“More recently, severe flooding, wildfires, drought and tornados have become frequent occurrences across South Africa, with climate change leading to charge in catastrophic losses. Most of all, these uncontrollable events highlight the folly in assuming that worst case scenarios are simply too unlikely to happen. Major assets such as cars and homes are often not properly insured which is a real concern. If this is the case, you may discover that you are only partially covered because of what insurers call the ‘average formula’ at claims stage,” explains Mandy.
The average formula explained

Example 1
You insured your household contents for R250 000, but the replacement value is perhaps double that amount, leaving you effectively 50% under-insured. If a storm blows in and you suffer a loss of R50 000, the insurance company may pay only 50% of the claim at R25 000, leaving you out of pocket for the balance of R25 000.

Example 2
You bought your home ten years ago for R500 000. As building costs increase, the replacement cost - not the market value which is a different thing altogether - has appreciated to around R1.5m, meaning that your home may be under-insured by as much as R1m. If your roof should collapse due to a tornado or catastrophic storm, at a replacement cost of R60 000, your insurance may pay, only R20 000.

“An alarming aside is that property owners who pledge their homes as security for loans are in danger of having to honour those loans out of their own pocket should they be under-insured and suffer a major loss. Ironically, people will often insure their cell phones before they make sure that their house is properly covered. If your home burned down, it is probably highly unlikely that you would have enough money in your savings to rebuild it, replace all your household contents such as furniture, appliances and clothes and maintain your standard of living,” Mandy adds.

Often insurance is seen as a grudge purchase, however what most people don’t think about is that planning and saving for the future depends heavily on having a well-managed insurance plan in place that meets your basic protection needs right now, and sees to it that your assets are protected and secured for the future.
Paying the right price for the right amount of cover

It’s perfectly possible to save sensibly on insurance premiums without exposing yourself to crippling uninsured losses. Aon provides the following tips to ensure that you’re paying the right price for the right amount of cover:

    Accept a bigger excess (the first amount you would pay on a claim), valuing accurately and excluding certain items. Another suggestion is to accept a risk in its entirety, in other words not to insure at all, an item which is readily replaceable or stands very little likelihood of being damaged, lost or stolen.
    Consolidate your household and motor insurance with one insurer. Not only could it reduce your premium, but you will also save on debit order fees and policy administration charges.
    Install a good alarm system or upgrade your security in general, allowing you to receive discounts on your premium from underwriters who recognise that claims are less likely to arise when security risks are addressed.
    Insure your property accurately for replacement cost, avoiding the trap of lowering your cover due to market value fluctuations in the current property market space.
    Your broker will provide advice on the selection of cover and understanding of policy terms and conditions, but always read the fine print.
    Remember to inform your broker of any change of address or improvements to your home, such as putting in a new security system.
    Always insure adequately where big ticket items are involved, notably motor vehicles that are subject to risk both on the road and in your residential premises. Always opt to insure your vehicle for retail value and remember to nominate additional drivers who may need to use the vehicle, as some insurers will reject an accident claim if the driver is not nominated.

“A well-conceived insurance program is achieved by consulting with an expert broker who can assess your unique needs, risk profile and budget, and tailor-make an insurance offering that gives you peace of mind knowing that your hard earned assets are safeguarded in the event of a loss and, most importantly, that you’re paying the right price for the right amount of cover,” concludes Mandy.

The SME sector has been hard hit by the COVID-19 pandemic, and with it, the risks that small businesses face has either amplified or changed fundamentally. When you’re in the thick of running your business and tending to day-to-day work responsibilities, it’s easy to leave aspects such as risk and insurance simply to ‘tick’ over, but that could leave you compromised as your business evolves and the exposures in your environment and industry change.  

Aon South Africa, risk advisors and insurance brokers, share some insights into some of the key risks that SMEs face, and the important risk trends and insurance solutions that every SME should have on their radar...

1. Has the nature of your business done a 360-pivot as a result of the pandemic?

Many businesses were forced to change their business models, product offerings and premises as a result of the economic fallout of the pandemic. These changes hold significant implications in terms of the nature of the risk that your insurer initially agreed to cover, to what the nature of risk may be now.  Have you changed business premises, or are you working from home? Where are you storing stock and what security measures are in place? Has your restaurant been changed to a catering operation? Have you changed your manufacturing processes or the nature of products being produced? Are you sub-letting your premises?  Are you doing professional consulting work and charging clients for your advice or expertise?  

Your insurance cover could be compromised or entirely negated if the profile of the risk initially accepted by an insurer at inception of the policy is materially altered, without notice and updating the risk mitigation measures that may be required by the insurer. It is crucial to engage with your risk advisor and insurance broker if any aspect of the nature of your business and risk profile has changed in recent months.  This is an invaluable exercise not only to ensure that you are adequately insured for known risks but also to explore any unforeseen risks that you may not have considered.

2. Vehicle Insurance

Whether you run a handful of motor vehicles or a fleet network, make sure your vehicle insurance is fit for purpose with sufficient liability cover.  From an asset replacement perspective, your business vehicles should be insured at no less than retail value, which is what a car dealer would sell it for taking into consideration age, mileage and condition. Don’t forget to add extras or accessories such as tracking systems, tow bars, roof racks and so on. The inclusion of car hire can also be beneficial if your business is heavily reliant on the vehicle to get work done – providing for a hired vehicle while your vehicle is either being repaired or replaced following an accident or theft.

3. Goods in transit insurance

Goods in transit insurance is a vital but often overlooked aspect of SME risk management. If you’re a tradesman or contractor transporting equipment, materials or stock, the protection of your goods and customer orders while in transit against damage or loss due to an accident, theft or hijacking is critical to the sustainability of your business, your reputation and financial stability. If these goods are damaged or entirely written off during transit due to a vehicle accident, theft or hijacking, you could be left in a difficult predicament of having to replace the damaged goods at your cost if not insured, not to mention the enormous reputational damage which could ensue if customers are left compromised. A ‘goods in transit’ policy is an essential cover for any SME involved in the supply and transport of stock and finished items.

4. Cyber Risk

Cybercrime has been massively amplified in our heavily digitised lives. If your business has a network, an internet connection and holds sensitive or personally identifiable data, then your business is at risk. A cyber breach has the potential to inflict enormous reputational damage, cause major interruption to normal business operations and income potential, and can also have legal ramifications if personal and financial information is compromised in the context of the Consumer Protection Act (CPA), the Electronic Communications and Transactions Act (ECT) and the Protection of Personal Information Act (POPI). The statistics clearly show that any perceptions that cyber risk only affects large businesses or corporations are unfounded. Talk to your professional broker about cyber protection for your SME and the serious financial and legal liability if things go wrong.

5. Business Interruption

In the unforeseen circumstances that your business premises burned down, your assets cover will take care of replacing the lost items, but what happens if you are unable to trade for weeks, even months and as a result your revenue halts altogether or is diminished?  Business interruption insurance is vitally important to tide your business over in terms of lost income as a result of a material damage claim until your business is back to operating as usual.

6. Director and Officers Liability Insurance

As the owner of a privately-owned business, you may not think that you need the insurance protection that large, listed companies have for their directors and officers. However, companies of all sizes, even non-profit organisations and membership associations need comprehensive cover for liabilities that could arise from wrongdoings by directors and officers in conducting their managerial responsibilities.  Where a claim is lodged, the cost of legal defence and investigating an allegation, even if proved unfounded, can run into millions of Rands, draining company and personal financial resources, as well as the human resources that should be focused on running the business. An area that can also give rise to D&O liability is the fact that start-up businesses usually don’t have the necessary funds to employ specialised skills for issues around complex legal matters, making them more susceptible to legal compliance claims brought by governmental agencies or regulatory bodies on issues such as tax, labour, data privacy and even environmental laws.

7. Professional Indemnity

No professional relishes the thought of making a mistake or being accused of being negligent in the execution of their professional duties. You may not even have made a mistake for a claim of negligence to be brought against you, however, you’ll still need to defend any such claims to resolution, which can be a costly affair, both in time and financially. It is when things go awry, and a claim is lodged that the real value of professional indemnity (PI) insurance and professional advice are truly appreciated.  Professional Indemnity (PI) insurance provides the insured party with indemnity in respect of legal liability arising out of the practice of their profession.  Indemnity cover will include the professional’s own legal costs, as well as any compensation to the claimant and/or legal costs that are up to the limit of indemnity of the policy, providing all parties with peace of mind and financial protection in the event of a claim. PI insurance is designed not only for traditional professionals who provide advice or a service to their customers but anyone who holds themselves out to be an expert in a particular field and whose expertise and advice the public might rely on, for example, an IT expert.

8. Commercial Crime

In the current tough economic environment, fraudsters are becoming more creative and syndicates are also at play, which means business owners are facing ever-increasing risk from commercial crimes in areas such as credit payments, EFT transfers, debtors, petty cash abuse, cash theft, international transfers, payroll fraud (ghost employees) and stock theft.   The fundamental solution is a commercial crime framework, incorporating indemnity for losses resulting from employee dishonesty, forgery or alternation, fraudulent transfer instructions and third-party computer crime.

9. Trade Credit

Accounts receivable is often the largest uninsured asset on your company’s balance sheet and can account for up to 40% or more of your company’s total assets. Any business that has a debtor’s book

offering credit terms, regardless of whether the debtor is local or across borders, needs comprehensive protection from the implications of a financial loss sustained by non-payment, insolvency and business rescue of its debtors. Trade credit insurance offers protection of accounts receivables against non-payment due to slow pay, insolvency or foreign non-transfer risk. Coverage is designed to prevent disruptive losses, reduce the risk of key account concentration levels, and provide risk transfer of bad debt issues.  With trade credit in place, companies can also enhance their bank financing in terms of improving the lending relationship, enhance their balance sheet and gain access to more capital at reduced rates.

Regardless of size or status, there is no one size fits all approach to business risk insurance, especially in a radically changing business environment.  It all depends on the size of the company, the nature of its business and its unique levels of exposure. Consulting with a professional Aon risk advisor is an invaluable exercise in protecting your business, reputation, clients and bottom line.

Without the financial experience of what insurance is all about, it’s likely to be challenging trying to unravel why the insurance quotes you receive vary so radically in premium price, the terms of cover, the excess or deductible you’ll need to pay in event of a claim, and most importantly, what is and isn’t covered

Lions Risk provide invaluable tips that will help you when assessing your motor insurance:

Do the insurance research before you buy a vehicle

This may affect your choice of vehicle in the end when one looks at things like affordability, service costs, parts availability, required security measures and crime stats.  There are so many aspects that affect your motor insurance, ranging from the make and model of the vehicle, through to the cost of parts and availability, whether you need car hire in the event of an accident, what the vehicle is utilised for, your driver profile and age and even your credit rating.  Be aware of the type of security precautions you will need, such as a tracking device as you need to factor the ongoing subscription cost into your monthly expenses.  With all this to consider, it can be a minefield trying to navigate the terms and conditions of your motor insurance policy without the insights of an experienced eye.

Insure your new vehicle for its list price

It is essential to check the terms and conditions of your vehicle cover. If you are purchasing a new vehicle, you can insure it for the new list price of that vehicle for the first 12 months. Thereafter it is recommended to insure your vehicle for its retail value, which is the price the dealer will sell a second-hand vehicle to you. Market value is the average of the difference in price between retail value and its trade-in value, in other words what you could expect to receive from a dealer, were you to trade the vehicle in, which is why insuring your vehicle for its retail value is preferable.

Third party liability

Besides the obvious cover for accident damage and theft, your motor insurance also provides you with third party liability cover which is embedded in your policy. Third party liability is like having an umbrella on a cloudy day. You might not need it, but in a sudden heavy downpour, you’ll be grateful you have it.  This cover protects you against a third party suing you in your personal capacity for financial loss, physical injury or death in the event of an accident.

Don’t assume you are covered for everything

Certain events are not always automatically covered on a standard motor vehicle insurance agreement, such as scratch and dent cover, tyre cover, hail damage cover as a few examples. You may need to purchase these covers at an additional premium. Finding out that hail cover was excluded on your policy after your car has been damaged by hail, can hurt your pocket, financially.     

Likewise, remember to specify any add-ons to your vehicle that are not standard features on the vehicle such as alloy mag wheels or a specific sound system, nudge bars and side steps and additional lights.  These all add additional value to the vehicle and need to be accounted for in your sum insured. If they are not specified, they won’t be covered.