How junk status affects short term insurance
Over the last two weeks, there have been lots of questions about how South Africa’s downgrade to junk status will affect consumers. Businesses and individuals are bracing themselves for the knock-on effect of the ratings downgrade.
Essentially, the ratings downgrade activated the rand’s devaluation. There is an inseparable link between the rand’s value, the interest rate and the inflation rate. Downward pressure on the one, over time, almost always negatively affects the other two.
Interest rate increase
An interest rate increase will affect all South Africans who are in debt, as credit will become more expensive. So, it will be more difficult to get a loan or a bond from a financial institution, and it will cost more than it did before the downgrade. If you already have a loan from the bank, it will become more expensive to service your loan.
Homeowners with a mortgage will experience additional pressure on their already high living costs and will have to manage their personal finances with far more discipline, leading to consumers spending less. Pressure thanks to the increased cost of mortgage repayments may make consumers (wrongly) consider decreasing or even cancelling their homeowners’ insurance to save money. This could end in a situation where consumers are underinsured at claim stage, negatively affecting their ability to recover from any loss or damage.
Business owners with bank loans will be in the same - pressurised - position. They will have to look at options to consolidate debt and clear short-term debt faster to create breathing space. However, being underinsured as a business owner could mean you are unable to continue operating your business seamlessly, should it suffer a loss or damage event.
Impact on short term insurance
We can expect insurance premiums to increase, particularly car insurance. The reason is that the cost of imported car parts will increase thanks to a weaker rand. This means it will cost more to repair a vehicle, which will eventually lead to an increase in insurance premiums.
In times of economic pressure when consumers start to feel the pinch, they look for areas to cut costs. Unfortunately, we have experienced consumers exposing themselves to enormous risks by cancelling their insurance policies in an effort to save a few hundred rand every month. While this may bring some relief in the short term, it exposes the consumer to a far more expensive - and potentially financially overwhelming - risk in the medium term.
Should you be involved in a car accident without insurance, there is a good chance you will not be able to pay for the repairs from your pocket and you will be forced to take out a (now even more expensive) loan. This will add further pressure to your increased living expenses. In an even worse case scenario, you may lose your car in an accident and not be in a financial position to replace it.
Experts’ say that a weaker rand will also affect the petrol price and eventually imported products like food and clothing. This means that the overall cost of transporting goods, a cost passed onto the consumer, as well as the general price of groceries and clothing will increase, adding further pressure on South African families.
Businesses will also be under pressure due to the inevitable decrease in consumer spending caused by an increased interest rate. Business owners will need to keep their cover as comprehensive as possible and avoid the temptation to cancel essential cover such as business interruption insurance, liability insurance and SASRIA cover.