The depreciation of the rand against major currencies has had a detrimental impact on the construction industry. This is mainly due to the fact that a significant percentage of construction plant is imported from Europe, the US and Asia, resulting in significant increases in the local purchase prices of the plant, as well as the cost of spare parts for repairs. The impact of this has not only affected suppliers and customers, but has also affected insurers.
The increased costs noted above, largely due to the depreciation of the rand, have led to a noticeable increase in instances of under-insurance of construction plant and equipment. If the customers were to increase the sums insured to reflect the correct values, this would result in increased insurance premiums, for a sector in economic decline and a bleak outlook. However, where the customers fail to adequately insure their plant and equipment, they carry a significant portion of the risk, as, in the event of a claim for loss of or damage to same, they would be under-insured, and claim settlements/payouts would be proportionately reduced. The result of this is that in certain cases, the clients may not be able to replace or repair damaged or stolen equipment, thus adversely affecting their businesses. From the Insurers point of view, this trend has a detrimental effect on their bottom line, as the inadequate Sums Insured will result in a reduction in premium income.
Construction plant costs millions. A 30% devaluation in the rand coupled with normal inflation can see customers having to pay hundreds of thousands out of their pockets. Insurers have also seen an increase in settlement disputes on claims where average has been applied, either when there has been partial damage, and also in instances where the policy warrants that insurers settle the market value of the insured plant item. There is a widening gap between the market value of plant items and their new replacement value. With a shrinking construction market, and with the closure of many construction companies, the value of plant in a market of willing buyers and sellers has declined significantly due to an oversupply of used plant.
To give an example of the effect of the devaluation of the rand, an insured recently suffered damage to a midrange American made Dozer, the client bought the Dozer brand new in 2013 for R7 500 000.00. However, the same machine is currently being sold for R13 000 000.00, a 73.00% increase in three years. If one accounts for the rate of inflation (on CPI) the new sale value should be R9 250 000.00 and one can ascribe the additional 38% increase to the Rand’s depreciation against the US$. The knock-on effect on a claim could be the following - If the client is insured on NRV basis with a 1 July renewal the 27% increase in the Rand Dollar and New sale value of the machine could mean that Insurers will have to apply average on the claim.
With GDP growth below 1%, insurers have gone into a price war for the few customers that are doing well. The rates are getting thinner and this is also impacting the bottom line. A small claim can see the loss ratios of the customer shoot through the roof.
With current developments in the European markets and the recent “Brexit”, the world currencies will be more volatile and will directly impact on our Engineering book.
For more information contact Brad Edwards on email@example.com