What is insurance?
Q&A with Deon Jansen van Vuuren
Q: What is insurance?
A: Insurance is an agreement of payment by an insurer, should the insured suffer financial loss. Insurance is also a guarantee that a valid claim will be paid subject to certain terms and conditions.
Q: What does typical building insurance cover?
A: Typical building insurance covers damage caused by fire, water, riot, theft, subsidence and also includes public liability.
Q: What does typical content insurance cover?
A: Typical content insurance covers damage to accidental and specialised items.
Q: Is insurance only taken up to ease our conscience that we have a policy in place, as this is a good thing to have?
A: Risk-aversion is our dislike of uncertainty, though the price we pay for the assurance is weighted against the removal of such risk.
Q: What can cause a no-claim situation?
A: The building and content should comply with basic good house construction and acceptable regulations. Any illegal structures which do not comply with the local authority’s bylaws and regulations (basic materials and building methods) will result in a no-claim situation. Unfortunately, the onus is on the insured (you) to render these “approved conditions” or either take the risk of a no-claim. However, should an unauthorised section be noted and excluded in writing and in the policy document from the remaining insurance cover, the insured is protected from a no-claim scenario. Suddenly the function of insurance or risk management originates and begs the question: why work hard to make money and then neglect to sufficiently protect your assets?
Q: Why are properties often over- or under-insured even though the correct value was established at the commencement of the policy?
A: The continuous annual escalation rate, which is but a factor that the insurer obtains from the broader economic engine, is not adequate to prevent over-/under-inflation of the replacement costs. The client pays for the inflated insurance portion, but derives no benefit from the unnecessary expense.
Q: What then is the solution to over- or under-insurance although the correct value was established at the commencement of the policy?
A: In order to determine the appropriate escalation rate, the composition of building materials of the property being insured should be known. This will allow for a profiled escalation rate calculation on an annual basis that can be communicated to the insurer to minimize over- or under-insurance scenarios. Please note, the insurer applies an internally computed escalation rate in absence of suggested rates/replacement cost by the insured so as to enable a continuous insurance policy. The insurer is dependent on the insured (you) to advise on the required insurance amounts and/or escalation rates in order to maintain independence.