The stationery lists are being ticked off and the traffic is back. While the kids are groaning about algebra, there is one grown-up maths lesson that many men tragically fail every year.
We are talking about the dreaded “A-word” in insurance: Average.
If you’ve ever heard a friend complain, “I claimed for R50,000 but the insurer only paid me R25,000!”, they likely just flunked the test on the Principle of Average.
Here is your crash course on the brutal maths behind it, and how to pass.
The Syllabus: What is “Average”?
In plain English, the Principle of Average is a clause designed to deal with underinsurance.
If you insure an item for only 50% of its true replacement value, the insurer takes the view that you have decided to be your own insurer for the remaining 50%. Therefore, they will only pay 50% of any claim you make, regardless of the size.
The School Analogy
Think back to your school days. Imagine you have a big history exam covering 10 chapters. You decide you only have time to study 5 of them (50% of the material).
When you sit the exam, you cannot expect to get 100%. Even if you answer the questions on the chapters you studied perfectly, the maximum mark you can achieve is 50%.
If you only cover half the risk, you only get half the reward.
The Brutal Maths (Show Your Workings!)
Let’s look at a real-world scenario.
The Scenario: Mike has a man cave. The actual replacement value of the tech and furniture is R200,000. However, to save on premiums, he only insured it for R100,000.
The Event: A lightning surge fries his electronics. The replacement cost is R60,000.
The Expectation: Mike thinks, “My sum insured is R100,000, so I have plenty of cover for a R60,000 claim.”
The Reality: Because Mike is underinsured by 50%, the insurer applies the formula: (Sum Insured ÷ True Replacement Value) x Claim Amount = Payout
(R100,000 ÷ R200,000) x R60,000 = 0.5 (or 50%) x R60,000 = R30,000 Payout.
The Result: The insurer pays R30,000. Mike has to find the other R30,000 out of his own pocket.
How to Pass the Exam
Avoiding the average trap is simple, but it requires responsibility:
- Stop Guessing: Don’t just pluck a number out of the air.
- Do an Inventory: Walk room by room. What would it cost to replace everything brand new today?
- Update Regularly: Bought new gear or gadgets? Inflation driving up prices? Call your broker.
Don’t start this year with a financial failing grade. If you are unsure if your sums insured are accurate, let us help you do the math.
Let’s chat. www.first4men.co.za