LEADING EDGE | Westcon
Finances Review Your Risk Exposure
Businesses that procure equipment or supplies from international markets are at risk of significant losses if they have not reviewed the impact of the falling Rand on the insured value of their property and assets. In the last year, the cost to replace machinery or equipment procured in the US and Europe has rallied by more than 40%.
Between Jan 2015 and Jan 2016, the Rand devalued by 45% against the US Dollar from trading at R11.43 in January 2015 to R16.58 on 26 January 2016. By 22 Feb 2016, the Rand had recovered to R15.31 to the US Dollar, but still represents a massive shortfall compared with one year ago.
“Any manufacturing or retail operation that uses imported plant, machinery or materials will see the replacement cost of such equipment increase substantially if it is purchased in a currency such as Sterling, the Euro or the US Dollar. Assuming a claim occurred now against a policy which incepted on 1 July 2015 when the Rand Dollar was around R12.20 to the US Dollar and had to be replaced at the current exchange rate of R15.31, the current Rand value is at least 25% higher than its Rand value at inception. When you factor in inflation, that figure is closer to 35%,” explains David Stratton, Strategic Account Manager at Aon South Africa, risk advisors and insurance brokerage.
“It soon becomes very evident just how important it is to insure properly against such losses, which could see you underinsured by as much as 50% in the event of a loss or claim. Many policies will have a clause dealing with Escalation due to Currency Fluctuations, where the insurer will allow for changes in the Rand’s value over the course of the policy period. However, this clause is usually subject to a limit stated in percentage terms, and specified in the policy schedule. Given the Rand’s recent performance this percentage may be insufficient.
Other policies may be arranged on a Day 1 Average basis, average referring to the insurance term dealing with under-insurance in the event of a claim. In such cases the value at the inception date is not challenged when there are currency fluctuations but can be challenged if it was inadequate in the first place. However, this too can be limited to a specified percentage,” explains David.
It is worthwhile to have a professional valuation carried out on buildings and plant. In addition to having these assets correctly valued in a baseline valuation, it is also possible for the valuators to calculate the imported content of your insured values, which will enable you to assess the potential impact a currency fluctuation may have.
“In light of the continued volatility of the Rand, it is essential to safeguard your assets and your ability to recover successfully from a significant setback. A serious disaster such as a fire at a warehouse or manufacturing facility could have catastrophic consequences when faced with potentially massive underinsurance due to the depreciation of the Rand. Consult with a professional risk advisor who can assess your specific requirements and the extent of your imported content exposures through a thorough needs analysis, and clarify any shortcomings and exclusions in your cover,” concludes David..