By: Zain Hoosen, Engineering Specialist, Zurich South Africa
There are a number of factors currently influencing South Africa’s engineering sector – labour unrest, devaluation of the rand, a significant reduction in government’s infrastructure spend, a slump in commodity prices, energy insecurity and the global economy’s impact on emerging markets. Consequently, major construction and engineering groups are continuing to explore cross-border opportunities as part of their growth and diversification strategies. In addition, policy wording has come to the fore (which, for the most part, has remained the same for over 20 years), prompting insurers to adapt to customer needs and make adjustments where appropriate.
Some significant trends in the sector have led insurers to reassess their engineering policy wording. Many companies in the engineering industry purchase their equipment (bulldozers, cranes, etc.) internationally, making these businesses susceptible to price fluctuations; especially given the devaluation of the rand against the US dollar. If customers do not review and amend their sums insured at least annually, it is possible that they will fall short in the event of a claim. Rising repair costs are also a reality. Even though the value of equipment depreciates over time, repair charges continue to surge and could sometimes exceed the value of the insured equipment, making a total loss (write-off) more likely.
Currently, there is no established and acceptable “book value guide’’ in the industry. It, therefore, becomes challenging to determine the fair market or resale value of second-hand plant items. Many businesses make the mistake of citing the cost of purchase when insuring an asset. It stands to reason that this practice leads to many companies being underinsured, which could be detrimental to a business that solely relies on its equipment to operate. It is estimated that sums insured are trailing valuations by at least 20%. Of course, construction plant and machinery are increasingly being used outside of South Africa, making it critical to have appropriate and compliant cross-border insurance in place. All this happens against the backdrop of increasing regulation such as Treating Customers Fairly (TCF).
Putting in a good word
As a result, it has become necessary to revise the wording of policies relating to plant and machinery and the repair and replacement thereof. Placing the onus on the customer to establish the insured value of the plant and machinery for declaration to insurers will certainly limit any potential shortfalls due to value discrepancies. On the other hand, brokers have a key role in helping customers to determine fair representation of their assets, including seeking regular advice from professional valuators. The basis of indemnity will need to be simplified and understood by customers to enable a best fit solution for their portfolios and a smoother settlement outcome. Insurers may need to re-consider their approach to complex property valuation by providing in-house capability or by utilising a panel of approved specialists.
Increasing the limit for costs and expenses in order to recover and/or repatriate the damaged item will also need to be a consideration as will outlining a step-by-step process of how the loss amount will be computed and settled. Forward thinking insurers have already removed the ‘Average’ clause from policies (meaning that potential claims are no longer subject to co-insurance), added on cover that acts as a buffer in the event of any further currency volatility and are able to provide cover that protects plant and machinery that has left South Africa’s borders.
A word to the wise
South Africa’s engineering and construction sector is characterised by constant change, complex interdependencies and the need to continuously adapt. Insurers – who are focused on efficiencies, profitability and competitive advantage – need to be agile enough to adjust product portfolios, consider disruptive innovations and most importantly, revise policy wording to suit evolving customer needs. Of course, the role of the intermediary is critical to achieving this, providing invaluable expertise and advice to customers about potential risks and exposures and informing insurers about ongoing market demands. Ultimately, it’s all about word of mouth.