Be careful when considering cutting short-term insurance cover, especially in a tough economy – GTC Risk Solutions

In tough economic climates – such as the recession South Africa finds itself in at the moment – households and small business owners may be tempted to reduce their short-term insurance, but the short-term savings may not justify the long-term cost of recovery in the event of a natural disaster.

Roy Wright, Head – Risk Solutions at leading financial advisory and wealth management business GTC, says consumers need to ensure they know exactly what their insurance policies provide cover for, especially considering the possible effects of floods or fire. The recent storms in Cape Town and the devastating fires along the Garden Route, particularly in Knysna, are tragic reminders of the ongoing need for inclusive cover.

“Most modern insurance policies offer comprehensive cover, which protect against many eventualities, from theft or damage to natural disasters, such as floods and fire. Unfortunately, when economic conditions worsen, short-term insurance is often the first expense item that households or small business owners trim.”

“Whilst home owners often retain insurance to ensure that their physical buildings are covered, they often reduce or remove cover for the contents of their properties, opting out of comprehensive cover – which would include insurance against natural disasters – and downgrade to cover only theft or malicious damage to properties,” he says.

Similarly, some home and business owners believe their insurance policy covers all eventualities – including natural disasters – when in fact it only extends to the building or property, he says, further highlighting the need to understand exactly what is covered by the policy.

Wright cautions against reducing short-term insurance cover for households and businesses, as the cost of recovery can be debilitating.  Poor risk management policies leave a business vulnerable to major long-term setbacks. While a business may manage to survive an initial loss, the true risks lie in how long it takes a business to recover to full operation.

“We always urge families – and  small businesses – to seek professional risk management advice so that a thorough risk analysis can be conducted, to determine what the risks are, what should be covered, and whether they would be able carry the risks themselves, before trimming insurance coverage. Whilst short-term insurance is usually a grudge purchase, as you are essentially buying protection against something you hope will not happen, it’s important to remember that foregoing this protection today may cause far greater issues for tomorrow,” he says.  “GTC ensures that our clients recovery plans are discussed and in place, as we believe these are just as important as being able to provide and maintain relevant cover.”

Wright emphasises that no insurance policy can compensate for the sentimental value of the loss of a house or certain possessions. “Instead, the knowledge that you are adequately covered can provide much-needed peace of mind when starting the very difficult task of rebuilding your family’s life after a disaster has struck.”

He believes such protection is especially important to ensure the longevity of smaller businesses in the event of a tragedy.

“Large and established businesses often view comprehensive short-term insurance as a non-negotiable business expense to protect the future of the employees, the investment of the shareholders and the ultimate wellbeing of the business. Smaller businesses, though, often act like households when cash flow becomes tough, and opt to reduce their cover to save costs, at the risk of the business’ future.”

The cost of rebuilding a small business can be a major setback if owners have not mitigated sufficiently against unexpected risks.

According to Wright, one of the positive developments of the insurance industry over the past decade has been the growth in innovation in terms of product offerings.

“In the end, the level of short-term insurance is a personal choice, as every household or business’ circumstances and appetite for risk differ. The industry has responded to the changes in lifestyles and values, and nowadays consumers enjoy much more choice and flexibility with regards to the type and level of cover for households and businesses.”

“Families and businesses need to be comfortable with the way in which they protect themselves against risks. There is no single approach that is the best for all, but consumers and business owners must ensure they know what they are covered for and what not, and be comfortable that they have the basic protection to recover financially from unforeseen risks or natural disasters,” Wright concludes.