IN tough economic conditions it is more important than ever for businesses to ensure that their assets are adequately protected against rising replacement costs and to adjust their insured values in accordance with inflation. And for business people who import assets – plant, machinery and equipment – the volatile currency makes it even more crucial to ensure that their insurance values are accurate.

So says Lourens Joubert, head of corporate and commercial underwriting at Santam, the country’s largest short-term insurer. He explains that most insurance policies on commercial assets such as buildings, contents and equipment base the indemnity on the new replacement value of these assets.

“Most policies refer to the ‘average clause’. This is best explained by way of an example: if a business property is insured for R500 000, but at the time of the loss it is established that the new replacement value is R1 million, all claims will be reduced by 50%. The simple explanation is that, as the insurance company effectively only received 50% of the premium – based on the new replacement value – it will only be in a position to pay 50% of any loss,” he says.

Joubert says it is critical to ensure that the sums insured are adjusted at least annually to compensate for rising inflation.

“The value or cost of an item generally increases with inflation each year. If you insure your business premises for the correct amount in January and the loss occurs in December, the value will be too low, and this could be reflected in the payout you receive from your insurance company.”

“Fortunately, most policies provide for an extension to cover the increasing inflation on the specific item, at a pre-selected rate, but this will only apply over the twelve month period and an additional premium is payable,” he says.

Where businesses import plant, machinery and equipment, the sums insured must be adjusted not only in accordance with inflation, but also to take into account any substantial changes in the exchange rate. The replacement value of the imported item will be determined in accordance with the rate of exchange applying at the time the loss occurs.

Joubert says that by adopting a risk management approach, commercial policyholders are best placed to determine their insurance needs and to limit any increases in the premiums payable on their policies.

“While it is essential that assets should be insured at their correct inflation-adjusted values, it is important to note that some assets, such as motor vehicles, decline in value. Policyholders must adjust their vehicle values to ensure that they are not paying excessive premiums.

“Similarly, as technology evolves and becomes more commonplace, electronic goods tend to become less expensive. Commercial policyholders need to bear this in mind when establishing the replacement value of their assets, as part of an overall risk management strategy”, he says.