Higher inflation and the continuing depreciation of the Rand against other major currencies have made falling into the dreaded under-insurance trap a sure-fire possibility for consumers who haven't updated their short-term insurance policies in a while.

That's because their possessions are unlikely to be insured at their current replacement values. And, this means that if they suffer a loss and have to make a claim, the chances are they won't be covered for the full amount.

Angelo Haggiyannes, director of Auto & General Insurance, explains that most insurance policies pay out on a 'new for old' basis when it comes to household goods and that under-insurance happens when there is a mismatch between the level of cover the client has purchased and the replacement value of what is being insured.

Replacement values go up

"When you take out an insurance policy the replacement value of the goods being insured is calculated and the premiums are determined accordingly. However, replacement values change over time and in all likelihood, they go up.

"If the policy is not reviewed and the higher replacement value is not reflected in the monthly premium, cover becomes inadequate and the insurer will not meet the claim in full. The reason for this is that you are paying a premium for house contents cover which is insured for an amount less than what the true replacement value is. In other words the value that was truly at risk was higher than that for which you are insured for and therefore a higher premium would have been due.

"This problem is becoming more pronounced in the economic climate we are currently experiencing. Things are much more expensive to buy now than they were two years ago thanks to rising inflation and other factors such as burgeoning distribution costs due to the higher fuel price. Then of course, when you look at items that are typically imported from elsewhere, there are the effects of the weakening Rand driving prices further upwards.

"Unfortunately under-insurance is a curveball that many consumers just don't anticipate and the reality only really sets in when they have to fork out the shortfall not covered by insurance. Depending on what is being replaced — and the extent to which the replacement value has increased in the time that has lapsed since the policy was last updated — the shortfall can be significant. Most often it is unexpected cost that consumers can ill-afford," says Haggiyannes adding that under-insurance is not a ploy by insurers to avoid paying out claims.

"In fact, it is becoming a major problem for all short-term insurers and we too want to avoid it. Obviously there is a great deal of unpleasantness and frustration when a claimant finds they are not going to have their claim paid out in full because they are under-insured. As a result, insurance companies often get a bad rap and unfairly so."

Avoiding under-insurance is as simple as reviewing insurance policies at least twice a year

Haggiyannes says avoiding under-insurance is as simple as reviewing and updating insurance policies at least twice a year.

"It is important to update your inventory list on a regular basis to ensure that new items to be insured are included and to remove items that no longer need to be insured. When you are updating your inventory, you need to make a realistic estimate of the true replacement value of the goods on the list.

"Don't underestimate the cost of replacing items to try and lower your monthly premiums because you could fall short if you ever need to make a claim. Similarly, avoid overestimating replacement values because this will result in you being over insured and you will be throwing money away unnecessarily every month," Haggiyannes advises.

He concludes by saying that correcting cover should be painless.

"Every year, Auto & General increases its client's cover according to inflation," Haggiyannes warns. "Those percentage increases are calculated on the base amount for which you insured and that might have been too low. So we still suggest that with the rapid level of inflation clients personally review their own policy. Simply contact your insurance company or broker for assistance with an assessment of replacement values and to update your inventory list. Remember, your short-term insurer doesn't want you to fall into the under-insurance gap just as much as you don't want to fall into it."