Insurance consumers, particularly corporate institutions, are considering revaluation of their assets in view of rising inflation and foreign exchange pressures in the country.
They are worried that insured value of their assets may fall below replacement cost in the event of claims, particularly now that prices of goods and services have gone through the roof, with no sign of retreating at least in the short run.
Insurance brokers who represent consumers in major insurance transactions are engaging the risks carriers in the industry to consider premium review in view of rising inflation and FX pressure.
Nigeria’s inflation rate surged to a 17-year high of 19.64 percent in July 2022, according to the National Bureau of Statistics. On a year-to-date basis, inflation increased by over 400 basis points from 15.63 percent recorded in December 2021.
This is as Nigeria’s currency; the naira, continued its steady fall, depreciating to its lowest at 436.50 per dollar last Wednesday at the Investors and Exporters (I&E) foreign exchange window, and a low of 703 per dollar at the parallel market.
Consolidated Hallmark Insurance Plc, in carrying its customers along on the development in the market, has issued a call to its customers explaining the impact inflation on their risks.
The underwriter, in a letter to its customers, said the naira had experienced a continuous devaluation in recent times caused by the negative effects of fluctuating foreign exchange rates. These changes, the company noted, have led to a hike in the cost of goods and services, resulting in the need for an upward review of insured assets.
“We therefore wish to draw your attention to key aspects in claims administration. In the event of a claim arising from insured properties such as motor vehicles, betterment would be charged to bring the claimed amount at par with the current market value, whilst for other properties, a claim average would be applied.”
The company explained that average clause is a clause that requires the insured to bear a proportion of any loss in a case where the assets were insured for less than the reinstatement value.
It said: “The rationale behind this is that the current sum insured stated in the policy document is the maximum limit of liability upon which indemnity will be based upon.
“Therefore, to forestall average deductions or penalties for underinsurance, we highly recommend that you revalue your assets immediately to ensure that they represent the current reinstatement and replacement value.”
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Mayowa Adeduro, managing director/CEO of Tangerine Insurance, while sharing his thought on the impact of inflation on insured assets, said obviously, in an inflationary business climate, the best advice to give to businesses and asset owners is to constantly review the value of their assets including stocks in warehouses and finished goods.
According to him, the insured could also achieve this objective, especially in large industrial complex or building construction or engineering project, by what is known as ‘Escalation Clause’ provision in the insurance policy.
This clause ensures that future increase in cost up to a certain percentage limit is automatically covered in the event of occurrence of perils insured against, Adeduro said.
“I must say that inflation is no friend to any business concern or family as it reduces value of local currency and purchasing power of consumers; it discourages investment and pushes more people to poverty line and plunges economy into recession,” he said.
Adeduro said without diligent planning in an inflationary environment, business may not meet replacement cost of goods and services disposed, especially in a stagflation economy.
Charles Onwunali, an insurance broker who confirmed the development, said: “Yes some clients are approaching us for proper advice, and I can tell you it makes sense.”
According to him, the reason is to ensure that the value of the sum insured equals the replacement cost. “We are advising them to review, but if anyone fails, escalation clause will come. That means such client will have to look for alternative source of money to replace the insured assets if full loss occurs,” he said.
Onwunali said: “It is only proper to review the sum insured to current reality. Its simple economies and it is just a small amount of premium compared to what it will cost to close the gap when loss occurs.
“The danger that is inherent in not taking the right step before a loss should be the motivation.”
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