A property insurance policy should always include an escalation and an inflation extension. As the insured party, you need to understand what this cover is and why it is essential to include extensions to your property insurance cover.
Insurance cover for property is issued on a replacement value basis. The replacement value of your property at the policy’s inception will be affected by inflation during the period of cover. The costs of building materials, building services and other professional fees like architects and engineers will increase over time. As such, the replacement value on day 1 of your insurance cover is unlikely to be the same as on day 365. It is therefore advisable to make allowances for the effects of inflation on the cost of replacing the property. This is done by way of escalation and inflation clauses.
The reality is that many properties have an inadequate replacement value and are thus, totally under-insured. The inclusion of the escalation and inflation extensions is a positive step towards preventing a shortfall in insurance values.
ESCALATION
This extends the policy to include cover during the current period of insurance to ensure that the value of the property is increased during the insured period to avoid under-insurance in the event of a claim. The increase in value is determined by the specified percentage stated in the policy schedule. While most sectional title property insurers now include the cover at no additional premium, for those who do charge, the premium is traditionally calculated at the quoted premium rate and discounted by 50%.
Premium calculation where:
|
Sum Insured |
= |
R 10,000,000 | Escalation Sum Insured |
= |
R 10,000,000 x 10% |
= |
R 1,000,000 | |
| Premium Rate |
= |
0.070% | ||||||
| Escalation |
= |
10% | Escalation Premium |
= |
( R 1,000,000 x 0.070% ) x 50% |
Annual premium |
||
|
= |
R 700.00 x 50% |
= |
R 350.00 |
INFLATION
This extends the policy to include cover during the period of insurance immediately after the current period. The inflation sum insured is a specified percentage stated in the property’s policy schedule at the end of the current period of insurance, (i.e. basic + escalation sums insured).
The objective of inflation is to ensure that adequate cover is in force in the event of a substantial or total loss for which the reinstatement period will extend beyond the renewal date of the current period of insurance (which falls outside the extended cover provided by escalation). Inflation covers inflationary costs incurred in the reinstatement of the property after the period of insurance in which the loss occurred has come to an end.
While most sectional title property insurers include this cover at no additional premium, for those who do charge, the premium is traditionally calculated at the quoted premium rate and discounted by 75%.
Premium calculation where:
| Sum Insured |
= |
R 10,000,000 | Inflation Sum Insured |
= |
{R 10,000,000 + (R10,000,000 x 10%)} x 12% |
= |
R 1,320,000 | |
| Premium Rate |
= |
0.070% | ||||||
| Escalation |
= |
10% | Inflation Premium |
= |
( R 1,320,000 x 0.070% ) x 25% | Annual premium | ||
| Inflation |
= |
12% |
= |
R 924 x 25% |
= |
R 231.00 |