Volatility – is insurance cover affected?

The expression ‘volatility’ is generally used within the context of market conditions – like stock market performance and share prices – with the specific intention of drawing investors’ attention to the variables involved when investing, and the potential risks associated with such decisions.

In as much as volatility and unpredictability are part of any type of investment decision, does such a concept exist when it comes to insurance cover?

To answer this question, we need to establish the reasons why individuals purchase insurance in the first place.

Insurance cover provides protection against life’s little surprises by making available funds to help deal with these unexpected incidents when they occur.

We also need to understand the economics around insurance. The rand value of the amount of protection purchased is a constant figure that is not exposed to market volatility. Therefore, the payout amount is always a known figure that normally adjusts every year on the policy anniversary, and when it increases by an inflationary amount.

So, given this relative market stability, does the concept of volatility within the confines of insurance cover exist?

I believe it does.

Weakening rand to blame

For many years, South Africans were cut off from the rest of the world due to sanctions. With the advent of democracy in 1994, things changed radically and suddenly we were invited to join the global community again.

This meant South Africans could now invest offshore, thereby creating a reliable hedge against currency volatility and depreciation. In essence, this allowed local residents to ensure that their wealth did not disappear due to a weakening currency.

This rand hedge facility always remained within the domain of the investment world, and individuals with local rand-based insurance cover had their values pegged to the local currency.

So in rand terms individuals had ‘x’ amount of cover, but on a conversion to an offshore currency that figure was severely diminished due to currency weakness.

In other words, due to the rand’s continuous weakening over the past 21 years, the concept of volatility with respect to an individual’s insurance cover has crept into the picture.

Many South African residents have family living overseas. In rand terms, their local insurance benefits – if a life-changing event had to occur – could equate to a minimal amount when converted into a foreign currency.

Offshore life cover

Perhaps the more pressing question we should be asking then, is how do individuals protect themselves against the effects of this volatility?

There are local companies that offer what is known as offshore life cover. Here individuals purchase, in rands, offshore insurance (based on an amount quoted in US dollars) and pay the premiums in rands.

Although the premiums will fluctuate on a monthly basis due to currency volatility, the insurance cover amount is based on a US Dollar value, with payments made into an offshore bank account.

Individuals now have the opportunity to not only create a rand hedge vis-a-vis their capital and investments, but also when it comes to their personal insurance cover and a way to mitigate the volatility that comes with currency fluctuation.

In conclusion, the underlying motivation for purchasing insurance should always be remembered to ensure protection against unforeseen events.

If such products are not in place, families and beneficiaries will no doubt at some point experience tremendous uncertainty and volatility of their own.

Those individuals who do have such products in place now have the opportunity to mitigate the currency volatility that exists by purchasing offshore insurance, thereby ensuring that the true value of their personal estate isn’t eroded away due to rand weakness and volatility.