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Personal Lines Insurance
Saturday, April 1, 1989
Tails they win

Insurers have long criticised their customers for failing to insure adequately. Household contents, for instance, are often found to be underinsured - usually at a time when a claim is being presented. As a result, the claimed amount is adjusted by the assessor to account for underinsurance.
The figures that follow are tricky to work through, but what they mean is that you are a fool to underinsure. For example, supposing a person has insured the contents of his house for R50 000, but that the actual value is R60 000. He is therefore underinsured by 17%. Now supposing he suffers a loss and the agreed amount of the loss is R6 000. His claim will then be reduced by 17%, in proportion to the underinsurance, so only R5 000 will be paid out. Even after the loss he must increase his insurance because, in theory, he still has R54 000 of household goods left.
Unfortunately, this has happened so often that many a claimant is advised by his mates to increase his claim in anticipation of “losing out”. Taking the above example, where he suffers an actual loss of R6 000, he instead makes a claim for R7 000 in anticipation of the amount being reduced.
The assessor will find it very difficult to argue with the inflated claim, especially since the goods are now in the hands of the thief. He can, however, assess what’s left in the house. Here he establishes a value, R54 000, and records underinsurance. He’ll then add the R7 000 to what’s left giving him R61 000 - making the client underinsured by R 11 000 - or about 18% less than the true value.
Thus 18% is taken off the R7 000, and only R5 740 is paid out. It looks like the householder scored because he almost got back what he actually lost, and certainly more than if he’d been honest. But in reality, since he was underinsured the insurer has been receiving premiums on only R50 000, probably for a number of years.
To gel round this insurers have increased the rate they charge, for example, from 1,5% of sum insured to 1.8% of sum insured. Apart from increased incidence of claims such re-rating has helped to pay for underinsurance. So instead of paying R62.50 per month, or R750 a year, for the last two years at 1.5% on R50 000, our fraudulent claimant has being paying R75 a month, or R900 a year at 1,8% for the same amount of cover. It so happens this is the same premium as would be charged on R60 000 at 1,5%.
So who’s losing’? It must be the consumer. Meanwhile, where he gets caught underinsuring by accident, he also loses. It has become a vicious circle because those who do insure for the correct amount do so at the inflated premium rate. Fortunately, premium discounts have been introduced, reducing rates to around 1,6%. Commercial Union is one such company that has adopted a “thank you discount”.

Copyright © Insurance Times and Investments® Vol:2.4 1st April, 1989
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