Budgeting for your insurance

We are often asked how much we expect the premium to increase by this year.

Our clients expect us to say X per cent, but there is more to it than just adding on 10%. Here is an example of how to take a view on planning a community scheme’s insurance budget for the forthcoming year.

Step 1:

Obtain a copy of the last building replacement cost valuation. If it was done more than three years ago, get an updated one done.  If it was done two years ago, ascertain the building inflation rate for the past two years and add that to the original replacement value.

Example:

Last valuation done for January 2014: R40 000 000

Average BER inflation rate 2014 = 10.3%

Average BER inflation rate 2015 = 3.4%

Add 10.3%, then add 3.4% = R45 620 080

If the insurance company had increased the premium automatically, it would have been by 15% or 10% per annum. Remember, you are not by any means obliged to use the insurer’s automatic increase; it is simply a default.

Therefore, round up R45 620 080 to R46 000 000 and use this as the sum insured. If the exercise is done, a quote from the insurer may even result in a reduced or similar premium depending on the claims history.

Step 2:

Obtain a copy of the body corporate policy claims history and look at the trend.

If the average loss ratio over the past three years (excluding a large once-off fire, etc.) is higher than 55%, the insured can expect the insurer to increase the premium to improve the ratio going forward. If under 55%, one can expect premium rates to remain more or less the same.

Step 3:

Using the proposed new CSOS Act regulation’s minimum fidelity requirement, estimate:

(a) The community scheme’s investments and reserves at the end of its last financial year; and

(b) 25% of the community scheme’s operational budget for its current financial year.

If the total is below R1 000 000 and application for Fidcure is made, the body corporate can expect premiums more or less as follows:

• For bodies corporate whose managing agents carry PIMA fidelity, the Fidcure premium for the body corporate will be approximately R2 500 per annum.
• For bodies corporate whose managing agents have other professional indemnity or no cover, the Fidcure premium for the body corporate can be R6 000 per annum plus, if approved.

Step 4:

As new proposed STSM Act prescribed rules suggest, a valuation will be compulsory every three years. This must be budgeted for.

Obtain a quotation from one or two valuers in your region.

You can find a list of valuers at the bottom of this blog post in the blue block.

With the new proposed regulations indicating compulsory valuations and compulsory fidelity cover, it is prudent to budget for these items now.

Step 5:

Amalgamate the figures, e.g.

Estimated premium increase 4%, i.e. R2 000

Estimated fidelity premium R2 500

Estimated annualised valuation cost R2 000

Total increase: R6 500

As can be seen, there is more to budgeting insurance than just quoting a percentage. A good broker will guide and advise their client in this regard.