Unless you keep your eye firmly and constantly on the many current shifts in our economy, as a holder of short-term insurance you could be running the risk of being underinsured. That could of course prove to be a costly oversight should you ever have to claim.
It’s hard to believe, given the current economic challenges we face in South Africa, that there has been significant growth in some industries, accompanied by higher demand and prices. It is this unanticipated growth that could blindside you unexpectedly when it comes to your short-term insurance.
From daily conversations with clients, it’s clear that most continue to have a negative view of the general economic situation. But surprisingly many indicate that their own businesses or industries are doing well. This is specifically the case with used-car dealers.
Anyone who has recently purchased a second-hand vehicle from such a dealer, is likely to confirm that the prices of used vehicles have drastically increased in the past few months. That is because of the low-interest rate environment but could also be partially because demand for cheaper second-hand cars is higher than for new cars under the current difficult economic conditions.
However, one consequence of such a turn in this particular market that is often missed by vehicle owners, is that with such sudden increases in value, holders of short-term insurance may suddenly find themselves to be underinsured. Of course, that could also apply to other sectors or assets.
Vehicle values in South Africa are recorded by Transunion and made available to prospective buyers, dealers, insurers, and all other stakeholders. Values are usually presented on a trade, market and retail basis and users can even include extras and mileage to receive a more accurate valuation. These values are based on statistics received from banks and dealers and therefore the current value is actually a product of all the transactions that took place in the preceding few months.
When values suddenly go up, it takes time for the underlying transactions to have an impact on the average value and ultimately move the actual valuation upwards. You then find a situation in which buyers are actually purchasing vehicles for more than what the retail value is according to Transunion at that time. This impacts your insurance as your vehicle is insured for the current retail value as per the Transunion valuation.
If for example your vehicle is insured for R100,000 and it is written off and the insurer agrees to pay you out the R100,000, then you will most likely not be able to purchase the same vehicle as the one you had with that paid-out amount. This may leave many people furious as they feel that they have been paying their insurance and are now left with only enough capital to purchase an older or cheaper vehicle or having to pay in the difference out of their own pockets.
However, vehicle owners can take steps to prevent them from falling into this trap. The first would be to establish whether such negative impacts apply to you by simply contacting your insurer or broker to find out for how much your vehicle is insured. Then contact a few vehicle dealers to see if you could purchase the same or similar vehicle at the price that you are insured for.
If you find you would not be able to, then contact your broker or insurer to find out what your insurer’s requirements are to increase your insured value. Remember you cannot over-insure your vehicle. Therefore, you may have to prove what the actual current value of the vehicle is should you have to replace it.
Another option is to purchase an additional top-up product which could increase your insured value. Remember, there is a difference between credit-shortfall insurance and a product that will actually increase your insured value to what the actual value of the vehicle is. Credit-shortfall covers an individual when the retail price of the vehicle is less than the outstanding amount that is owed to the credit institution. This often happens when a vehicle is purchased that drastically reduces in value [or no deposit, 6-year financing, with end of term balloon payment]. Outstanding capital on a loan reduces slowly in the first few years after the loan has been taken. During these years, the vehicle is often worth less than the outstanding loan amount. Credit-shortfall insurance thus covers a person for this shortfall.
These unbalances usually eventually balance themselves out. Unfortunately, in the time it takes for this to happen, many may have to downgrade their vehicles after an unfortunate accident. If you are already paying a premium to insure your asset, then it may as well be worthwhile to make sure that it is insured for the correct amount. The small difference in premium may save you endless frustrations.
It’s not just the used-car market that is affected. The current low-interest environment is also resulting in the inflating of other asset prices, for instance for assets such as collectibles, watches, gold, jewellery, and any other assets that could appreciate in price. The price appreciation has been accelerated due to the historically low interest rate environment. One also must take note of the sudden drastic increase in steel prices and other building material which could drastically increase building costs. This in-turn could leave property owners under-insured and unable to rebuild or repair their house or other building after an event that resulted in an insurance claim.
If you are still uncertain as to how you might be affected and whether you are uninsured or not, it’s always wise to speak to your insurer, broker or financial advisor who will be able to assist you.
- Theoniel Mc Donald CFP® is Managing Director of Wealth Associates Central, Strategic Marketing Director of Wealth Associates South Africa, and is an Elected Director of the Financial Intermediary Association (FIA).