Why is it a risk to be underinsured?

Underinsurance is not a technical loophole that insurers use to get out of paying your claim in full. It arises whenever your cover falls short of the current replacement cost of your insured items.

You may take out a policy that provides adequate cover, but over time the replacement value may change and no longer reflect the true value of what you insured. When this happens you may be underinsured.

Underinsurance typically occurs on household contents, homeowners and business insurance. It can also arise when you insure items you take out of your home – cell phones, tablets, jewellery or bicycles – for all risks.

Can I be underinsured despite annual insured amount increases?

Many insurance policies include an automatic annual increase in the insured value. These automatic increases are typically linked to inflation as measured by the Consumer Price Index (CPI) or the insurer’s own index. These automatic increases may therefore not fully keep pace with actual replacement cost inflation, particularly for building costs, technology and specialist equipment.

You may also find yourself underinsured if you are, for example, buying new items for your home or renovating your building without increasing the insured value.

In your home, for example, you may upgrade furniture, replace appliances with better models and purchase more advanced and expensive computers, cell phones or other tech items.

For example, you might insure household contents for R350 000 and over a few years the insured value is increased for inflation to R450 000. But if you have upgraded your television, replaced ageing appliances with more expensive models and invested in new furniture, the replacement value of your possessions may increase to R580 000. That means you have a R130 000 shortfall between your insured amount and the actual cost of replacing your household contents after a major loss.

Many people only realise the significance of the gap between their insured value and the real cost of replacing their belongings when they need to claim because it can materially reduce a claim and leave you responsible for funding the shortfall in the replacement costs yourself.

Regular reviews and realistic valuations are the only reliable way to ensure your cover remains aligned with the value of what you own.

What happens if I am underinsured at claim stage? 

If you are underinsured and you submit a claim, your insurer will assess both the value of the lost items and the total replacement value of the insured items. If the insured amount is lower than the actual value, the claim is reduced proportionally even if the insured amount is enough to cover the loss in full.

Insurance operates on the principle that cover should correspond to the value of the items insured. When assets are underinsured, insurers adjust claim pay-outs to match the level of cover in place. This means you may receive only part of the claim – the proportion of the claim you will get paid is in line with the proportion of cover you had relative to the value of your insured item/s. This proportional reduction is applied under what is known as the average clause — a standard condition in most South African insurance policies.

Consider a home office with a replacement value of R60 000, including a laptop, monitor, desk and equipment. If it is insured for R30 000, it means only half of the current value of the items is covered. A claim for a burglary resulting in losses of R20 000 would therefore be paid out at only R10 000 – half of the value of the loss.

The same principle applies to larger losses. If household contents are worth R600 000 but insured for R450 000, only three quarters of any claim (R450 000 divided by R600 000) will be paid. Partial cover results in partial compensation.

Many people find it hard to understand and even counterintuitive that even if your loss is smaller than the amount for which you are insured, your claim can still be reduced if your total insured value falls short of the true replacement value of your possessions.

What practical steps will keep me properly insured?

You can avoid being underinsured by regularly reviewing your belongings and their replacement values. Home contents cover, for example, should evolve as your home evolves, while the cost of replacing your building if you own a freestanding home, should keep up with the cost of building it from scratch.

Remember to update your insured amounts after renovations, redecorating or buying high value items such as a new couch, jewellery or entertainment equipment. Even gradual upgrades can significantly increase the value of your contents over time.

For household contents, slightly higher cover can help reduce the risk of proportional claim reductions. For portable or all risks items, such as cameras, smartwatches and tablets, current market values should guide you on the amount for which you should insure them, as over-insuring may increase premiums unnecessarily.

Why is it important to keep a household inventory?

Burglaries, fires, floods and storm damage are unpredictable. Adequate household contents, homeowner’s insurance and business insurance can make these events easier to manage.

Whether you are taking out cover for the first time or reviewing an existing policy, compiling a detailed inventory of your belongings is an essential starting point. This inventory should be reviewed and updated annually, as your home or business evolves and your possessions change from year to year. Insurance against any interruption to the running of your business should also be kept up-to-date in line with your gross profits.

Valuing household and business contents can be challenging. Many people own inherited items, gifts or second-hand purchases for which original prices are unknown. For insurance purposes, what matters is the replacement value of each item – the cost of buying a comparable replacement today.

Also remember that over-insuring provides no additional benefit at claim stage, as your insurer will only ever pay the actual cost of replacement

Why is it important to keep good records? 

Clear records can simplify the claims process. Photographs of your belongings, accompanied by descriptions, model numbers and estimated replacement values, provide useful evidence of ownership. Receipts and proof of purchase should be retained for newer items, while valuation certificates for jewellery and artwork must be stored safely and kept current.

Digital tools can help track possessions and adjust values over time. Keeping both digital and printed copies of your inventory adds an extra layer of protection.

Creating a detailed inventory takes time, particularly in long-established homes. Yet the effort can make a meaningful difference after a loss by ensuring that items are not overlooked or undervalued.

Regular reviews may also reveal possessions that no longer need to be insured and help you keep your premiums aligned with your current lifestyle.

Why you need full cover to be financially resilient

Insurance is about more than policies and premiums. It is about financial resilience and the ability to recover when life takes an unexpected turn. Accurate valuations, regular reviews and realistic cover ensure that your protection works when it matters most. Insurance cannot prevent loss, but it can provide the means to rebuild and move forward. Taking the time to keep your cover aligned with the value of your home and its contents, your business, your vehicle or any other asset you insure, is a small effort that could make a meaningful difference in the future.

This article was written by financial journalist Thekiso Anthony Lefifi and reviewed by Desireé Groenewald, a senior technical specialist for product at PSG Insure