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A DEFINITION OF ESCALATION AND INFLATION Insurance cover for property such as buildings is issued on a replacement value basis.

The replacement value of your property at the time the policy is incepted will almost certainly be affected by inflation during the period of cover. The costs of building materials, building services and other professional fees such as architects and engineers will increase over time. As such the replacement value on day 1 of your insurance will not be the same as on day 365 of your insurance. It is always advisable therefore to make allowances for the effects of inflation on the cost of replacing the property. This is done by way of the Escalation and Inflation clauses in your policy. ESCALATION:- extends the policy to include cover during the current period of insurance in order to ensure that the value of the property is increased during the course of the period to avoid under insurance in the event of a claim. The increase in value is as per the specified percentage stated in the policy schedule and while most Sectional Title Property Insurers now include the cover at no additional premium, for those who do charge, the premium is traditionally calculated at the quoted premium rate and discounted by 50%. Premium calculation where .. Sum Insured = R 10,000,000 Premium Rate = 0.070% Escalation = 10% Escalation Sum Insured = R 10,000,000 x 10% = R 1,000,000 Escalation Premium = (R 1,000,000 x 0.070%) x 50% Annual premium = R 700.00 x 50% = R 350.00 INFLATION:- extends the policy to include cover during the period of insurance immediately after the current period. The sum insured is the specified percentage stated in the policy schedule of the sum insured as at the end of the current period of insurance, (i.e. basic + escalation sums insured). The object of Inflation is to ensure adequate cover is in force in the event of a substantial/total loss for which the reinstatement period will extend beyond the Renewal/Anniversary date of the current period of insurance and so fall outside the extended cover provided by Escalation. Inflation is therefore covering inflationary costs incurred in the reinstatement of the property after the period of insurance in which the loss occurred has come to an end. While most Sectional Title Property Insurers include this cover at no additional premium, for those who do charge, the premium is traditionally calculated at the quoted premium rate and discounted by 75%. Premium calculation where .. Sum Insured = R 10,000,000 Premium Rate = 0.070% Escalation = 10% Inflation = 12%

Inflation Sum Insured = {R 10,000,000 + (R10,000,000 x 10%)} x 12% = R 1,320,000 Inflation Premium = ( R 1,320,000 x 0.070% ) x 25% Annual premium = R 924 x 25% = R 231.00