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Collapsing Rand Plays Havoc on Insured Values

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The South African rand recently traded at its worst levels since 2012. As a consequence the devaluing Rand is also currently playing havoc with clients insured values and risk exposures. With the Rand collapsing against all major currencies, one needs to consider how best to handle this issue going forward. The Rand is one of several currencies to hit new lows against a rising dollar, following positive employment data released by the US last week and the change in interest rate. The Brazilian Real has pushed to almost 11-year lows; the Japanese yen is at an eight-year low; the Swedish krona is down to a six-year low and the Euro is teasing parity with the dollar at a new 12-year low. According to Reuters, concerns out of Europe and Asia – particularly doubts over Greece’s debt and deflationary pressure in China – have also weighed emerging market currencies down.

The Rand faced a rocky 2014, and has continued to slide in 2015.  Our currency is at the mercy of global markets, but there are also a number of local factors that contribute negatively. The falling Rand may be a blessing to exporters at home but for those importing, it drives up the cost of the goods imported. From an insurance point of view it is important for insured parties to assess the potential impact the falling currency may have on the insured value of their property and assets, and in particular, the cost to replace machinery or equipment procured overseas.

Since the middle of 2014 the rand has lost significant value against the three major currencies, mainly the US Dollar at close to 30%.  Any manufacturing operation which uses imported plant and machinery will see the replacement costs of such equipment increase by roughly the percentages noted above, depending on the currency in which it is purchased.

Assuming a claim occurred now against a policy, which incepted in July 2014, and plant had to be replaced from a supplier in Europe, the current rand value could therefore be at least 30% higher than its rand value at inception without even taking into account any inflationary factors.

Other potential impacts could be felt if stock or raw materials are imported. These values would also. In these scenarios it soon becomes very evident just how important it is to insure properly against such losses, which could see a client underinsured by as much as a third in the event of a loss or claim.

Chat your RBS broker about if you have concerns regarding the insured value of any of your property or belongings.

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