Here is a compiled article of Frequently Asked Questions courtesy of Alexander Forbes.

FAQ 1: Why is the premium increase on my Contents and Buildings premium so much higher than on Vehicles?

The premium for contents and buildings are based on two components.

Component 1 – Sum Insured

The first component of the premium is based on the Sum Insured value of the contents or buildings that are increased every year on the renewal of the policy.
Why are the Contents and Buildings Sum Insured values increased?
The Sum Insured is the amount of money that the home is covered for and is the most AFI will pay if the client’s home totally destroyed. It is also the amount it would cost to rebuild the home although that’s not the same as the home’s market value, which could be greater or less.
As building costs escalate every year, it is important to adjust the Sum Insured with the increase in building costs so that the client remains fully covered. Building costs consist of contractor tender prices as well as building input costs. Alexander Forbes Insurance looks to the Bureau of Economic Research building costs indices to ensure that appropriate increases are applied to buildings which reflect the escalation in building cost.
Another factor that should be taken into account is that rebuilding of a home is not immediate and may take anything from a few months up to a year. Over the period of rebuilding costs can be expected to continue to escalate, i.e. labour and material costs may be more expensive in 6 months time than they are now. This is taken into account in the % increase that is applied to the Sum Insured.
To help to prevent your sum insured from falling behind, we automatically increase it at renewal but despite this precaution, many of our client’s values remain too low. Please review your sum insured carefully. If you need professional assistance I can put you in touch with a valuator.
The client is covered for the cost of replacing the contents up to the Sum Insured. As items get more expensive over time, the Sum Insured will become inadequate to cover the replacement cost of the item. To help to prevent the client’s sum insured from falling behind, we automatically increase at renewal but despite this precaution, many of our client’s values remain too low. Please ensure that the client’s sum insured is reviewed carefully, a valuator should be consulted if necessary.

Component 2 – Insurer administration costs

The second part of the increase in the Buildings and Contents premium is due to escalating costs within AFI itself. The biggest cost here is the salaries of the people that work at AFI.
There is also IT costs, rental and general overheads. The inflationary increase allocated in this respect is hence the best estimate of the actual cost escalation in the business over the past year and may hence be higher than the current inflation in the economy.

FAQ 2: Why is my vehicle premium increasing if the value of my vehicle is depreciating?

Again inflation is responsible as the cost of towing, repairing and car hire will increase over time. The cost of repairs is split between labour, paint and parts. If vehicles are within warranty AFI needs to fit Original Equipment Manufacturers (“OEM”) parts which are imported in many cases. When parts are imported the exchange rate also plays a role. If parts are imported at a time when the Rand is very weak relative to major currencies such as the Dollar or Euro, the part is more expensive in Rand terms. The increase in the price of the part is then passed to the panel beater who purchases the parts and who in turn passes the increase to insurers who pay for repairs. This is why it is encouraged to fit alternative parts which are much cheaper but of the same quality as original OEM parts. It should be noted that alternative parts although cheaper than OEM parts also escalate with inflation over time and pricing will also have to allow for this.
There is also the fact that costs are escalating within AFI such as salaries and other overheads. Another reason is that when the vehicle value is reduced, it becomes more likely that repairs would exceed the percentage of the sum insured that triggers a write-off.

FAQ 3: The exchange rate has been stable over the past 6 months, why are you using it as an excuse for higher parts prices?

It depends on how much stocked parts a repairer or vehicle manufacturer has. There is generally a lag on inflation as manufacturers or repairers may have existing stock during the time of high inflation to afford not to pass the increase to their customers. However, any new stock that they buy will be more expensive and these increases will be passed onto insurers later on when existing stock has been depleted. That is why parts may still be very expensive even if the exchange rate is going through a relatively stable period.

Article courtesy of Alexander Forbes.

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