Don’t Get Caught Short: Understanding Underinsurance and the Principle of Average
Imagine packing a road trip cooler with enough snacks for two people, only to realise there are five of you in the car. By the time you hit the halfway mark, everyone is hungry, and there’s nothing left.
In the insurance world, this is exactly what underinsurance feels like. It happens when your insurance cover doesn’t match the actual value of your possessions or the cost to rebuild your home. If disaster strikes—whether it’s a fire, a burst pipe, or a burglary—you might expect a full payout, only to find your insurer is only covering a fraction of the bill.
At Howdie, we want to ensure you aren’t left with a financial gap when you need help most. Here is everything you need to know about the “Principle of Average” and how to stay protected.
The “Principle of Average” Explained
Many policyholders choose a lower “sum insured” to save on monthly premiums. However, if you insure your belongings for less than they are worth, insurers apply the Principle of Average. In simple terms: if you only insure 50% of the value of your property, the insurer will only pay 50% of any claim you make—even for small losses.
The Math in Action:
You insure your home for R1 million, but the actual cost to rebuild it today is R2 million. You are underinsured by 50%.
If a fire causes R50,000 worth of damage, the insurer won’t pay the full R50,000. They will pay 50% of the claim: R25,000 (minus your excess).
6 Common Mistakes That Lead to Underinsurance
Are you making these common errors?
- Using Purchase Price: Calculating your cover based on what you paid years ago rather than what it costs to replace today.
- The “Guesstimate” Trap: Picking a round number for your premiums rather than doing a room-by-room inventory.
- Ignoring the “Small Stuff”: Forgetting that shoes, linens, watches, and kitchen gadgets add up to tens of thousands of Rands very quickly.
- Building Basics Only: Forgetting that “rebuilding” includes demolition, rubble removal, and architect fees.
- Stagnant Policies: Failing to update your cover after buying new furniture, tech, or appliances.
- Renovations: Adding a pool, a deck, or a new kitchen without notifying your broker.
Frequently Asked Questions
1. Does inflation affect my cover?
Yes. While most insurers apply an annual inflation-linked increase to your sum insured, the cost of specialised items (like jewellery) or construction materials may rise faster than standard inflation. It is vital to review your policy annually to ensure these increases are keeping pace with reality.
2. What exactly is included in “rebuilding costs”?
It’s more than just bricks and mortar. You must account for:
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Demolishing the damaged structure and removing debris.
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Professional fees (Architects, Engineers, Surveyors).
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Compliance with the latest building regulations.
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Current labor and material costs.
3. How can I lower my premium without risking underinsurance?
Instead of lowering your sum insured, talk to your broker about increasing your excess. A higher excess can lower your monthly premium, but ensure you have that excess amount saved and available in case you need to claim.
How to Stay Properly Protected
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Conduct an Audit: Do a full inventory of your household contents at least once a year.
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Get Valuations: Obtain updated certificates for high-value items like art and jewelry.
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Be Proactive: If you start working from home and buy office equipment, or if you receive a luxury gift, update your policy immediately.
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Don’t Guess: If you aren’t sure of your home’s rebuilding value, consider a professional valuation.
The Bottom Line: Being properly insured is about peace of mind. Don’t let a “saving” of R100 a month today cost you R100,000 tomorrow.
