Inflation

Inflation is one of the world’s biggest challenges at the present time. Nowadays, whether you’re at a business meeting or having a personal exchange during everyday life, inflation seems to be the talk of the town! People are increasingly feeling the impact of the world’s rising fuel prices, lack of grain supply, and so forth. Thanks to government subsidies, Malta has managed to stabilise prices however, despite this, end consumers are still feeling the effects of inflation when purchasing products, services, and eating out. At present, Malta’s inflation rate stands at 5%.

On top of this, inflation is also affecting the value of our assets. If we purchased a home 5 years ago and we recalculated the expense to rebuild that home today, we would generally find that prices rose by 10%. The same can be noted for home decor and furnishings, anything from curtains to carpets has sky-rocketed in price. Considering that most of these items are imported to Malta, the prices of such items have had double the impact. Apart from the inflation rise – particularly due to the current situation between Russia-Ukraine – these items were all the more affected by the increased cost of supply chains, where shipping costs surged by more than 50% in the past two years. High demand and low supply of containers – which were mainly retained in Asia – supplemented this impact.

If we purchased a home 5 years ago and we recalculated the expense to rebuild that home today, we would generally find that prices rose by 10%. The same can be noted for home decor and furnishings, anything from curtains to carpets has sky-rocketed in price.

How does all this affect insurance and its consumers, and why are we highlighting this issue?

Inflation is inevitable and a consumer must always anticipate it. Therefore, a consumer must not only be aware of the price they are paying at the present time but rather, think about the price they will be paid in case of a future claim.

We must admit that this may be a technical subject, but our goal is to create awareness surrounding the conditions of our insurance policies sooner rather than later.

We’re going to break it down. Let’s say you bought your house 5 years ago for €200,000, it recently experienced an explosion and needs to be rebuilt. At the present time, the replacement value will be €200,000 x 40% increase in construction costs*, totalling €280,000 and amounting to a €80,000 increase.

Take another example where the house was purchased 25 years ago for €80,000 and today its value stands at €280,000. Similarly, if you purchased stock for €100,000 and the same stock today is costing you €150,000.

In all these examples, the prices are increasing due to inflation or other costs which cannot be ignored.  But while we do accept and adapt to these price increases, are we discussing them with our Insurance Advisors? Are we taking these increases into consideration when renewing our insurance policy, or are we insuring expiry sums to retain costs?

What will happen should you need to make a claim?

All insurance policies have something called the ‘Condition of Average’. This means that the sums insured should not reflect the replacement cost at the time of the loss. Therefore, the Insurer will only pay a proportion of the sum insured.  If we were to take the example mentioned above, where the customer that purchased a home 25 years ago and never updated the sum insured since the day of their mortgage, if they were to have to make a claim of €10,000 in the present day, the settlement works out as follows:

[€80,000 x €10,000] / €280,000 = €2,857

In this example, the client would only receive 29% (or one-third) of the costs incurred to repair the damage. The average is applied to all material damage claims and could heavily impact both households and businesses alike.

It is definitely not a walk in the park for claim handlers these days as they encounter and make more claims with underinsured values on a daily basis.  Replacing lost, damaged, or stolen items is no longer a simple process, and in comparison to pre-COVID times, turnaround time is longer than ever, with parts and other materials’ arrival to Malta being delayed.

So, what can we do? As an Insurance Broker and Claims specialist, I always keep the client at the heart of every conversation.  It is essential to ensure that the customer is always protected and to provide advice at every opportunity to make sure that the insurance policy is reflecting the correct replacement value.  I insist that we must treat our customers as if they are our own family in order to truly understand the demands and needs of each customer and provide the necessary advice.

Every practitioner is here to provide added value, which is why I always urge customers to reach out to their insurance advisor to ensure that inflation, and potentially other market changes, do not hinder the client in case of loss.

 

Fiona Borg CMIRM, DiP.CII, CBCI

Registered Insurance Broker and Chartered Risk Professional

 

*Eurostat figures