South Africa stands on the brink of recession, with rising interest rates taking the consumer lending rate up to 10.25% up from a low of 8.5% in July 2012. 2016 is shaping up to be a tough year, with not only interest rates but inflation, the cost of food, electricity and fuel costs all moving in one direction – up. As consumers increasingly come under pressure, the temptation to cut out or cut down on insurance costs becomes a very real one.

However, this is the one payment that should be non-negotiable, particularly so when you are already battling to make ends meet. “As tempting as it may be to reduce short-term insurance premiums or cancel policies altogether, we caution consumers to carefully consider the implications of being caught without insurance or with insurance cover that doesn’t deliver on what was promised,” says Edward Gibbens, Executive Head of Commercial and Personal Business at Santam.

He urges consumers to speak to their broker or insurer who can help them re-evaluate their cover and adapt it to their circumstances. “We can help you structure your insurance policy without compromising on quality cover. Remember that your short-term insurance cover is not fixed. You can revise it at any time to ensure that it still fits your personal circumstances and financial position.”

Implications of lapsed policies

“In times of economic difficulty, such as that experienced in 2008/2009, we tend to see higher policy lapse rates as consumers face increasing budget pressures,” says Gibbens.

An increased number of lapsed policies unfortunately reflects the high number of consumers that can no longer afford their insurance premiums. However, if one considers that more and more drivers are buying cars on hire purchase agreements with large residual values or balloon payments due at the end of the finance term, lapsing on a short-term insurance policy has significant implications.

For example, a consumer, Mr Smith, may have purchased a car worth R300 000 with a residual value of R90 000. This means Mr Smith’s monthly car instalments over the next five years are calculated based on him paying off an amount of R210 000 plus interest. At the end of the five year term, he still has to pay off a further R90 000. If his insurance policy on his car lapses, and in the worst case scenario, his car is written off in an accident or stolen, he still remains liable for the money he owes to the bank as per the hire purchase agreement.

To make matters worse, the full amount that Mr Smith owes to the bank becomes immediately payable because there is no longer an underlying security asset (the car). He has the option of applying for a personal loan to cover the amount due, but the interest rate on these loans is usually much higher than that of a hire purchase agreement.

If Mr Smith had maintained his insurance, he would have been paid out the insured value of the car. If he had opted for credit shortfall cover, he would also be paid out the difference between the insured value of the car and the amount he owed the bank (including the bank’s interest charges).

What is the trade-off when you opt for cheap insurance?

Consumers should understand what they are trading off for a cheap price, for example, some insurers offer a cheaper monthly premium for a higher excess in the event of a claim. This typically results in a nasty surprise when you claim and realise that you have to pay a substantial amount from your own pocket.

Gibbens advises consumers to consider these three main factors when choosing both personal and commercial insurance cover:
• Do the policies you are comparing all offer the same insurance cover?
• Are the amounts for which you are covered (the sums insured) exactly the same?
• Is the amount you have to pay out of your own pocket (the excess) the same for each policy that you are considering?
Understanding what cover you are buying is critically important because lower prices usually means less cover or more restricted cover. Cheaper insurance may also have more exclusions i.e. where certain things that you assume are covered are excluded in your policy contract, for example, you may think you have comprehensive motor insurance, only to find at claims stage that you are not covered for mechanical or electrical breakdowns.

Financial stability and claims-paying reputation of an insurer is another important factor to consider, says Gibbens. “Insurance matters most when you claim. We pay more money in claims than any other insurer, and we paid out on 99% of all claims made in the last year. For the 2015 year, across both personal and commercial lines, Santam settled an average of 40 000 claims a month,” he says.

According to the short-term insurance ombudsman’s most recent report, a high number of complaints per 1 000 claims can reflect that an insurer is dealing with claims unfairly. Santam boasts a rate of just two complaints out of every 1 000 claims.

Helping dreams flourish

Entrepreneurship flourishes during times of economic difficulty. Many South Africans are either taking or considering the plunge into entrepreneurship as they realise that the safety of a paid job is no longer guaranteed.

“Simple things, such as changing the insurance terms on a car from private use to business use or stating that a home is now also used as a place of business ensures that proper liability protection is in place. A lawsuit for injury on a business premises can sink a home start-up, and yet the insurance cost is very small.

“Consumers should understand that insuring their business is about much more than price. It is about the cover that they are getting for the price they pay,” says Gibbens.

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