How Devaluation and Inflation Can Affect Insurance Policies
Most insurance policies written by the National Insurance Institute (INS) are in colones, our local currency, which some unkind people disparagingly refer to as “funny money” or “Monopoly money.”
Over the past few years, the colón has been constantly devaluing, but it seems to be rallying with the Central Bank’s new controlled floating system, unveiled in October (TT, Oct. 20, 2005).
As the colón devalued, insurance policies expressed in colones became less and less effective. Following is an analysis of the effect of devaluation and inflation on several different policies.
Home Fire and Natural Disaster Policy
You are supposed to insure your house at the estimated cost of rebuilding, less depreciation at 1% per year since the house was constructed. Cost of construction seems to inflate at a rate greater than that of general inflation, so the insured value in this type of insurance bears watching.
For its home fire policy, INS offers an option called PCI (Protección contra Inflación, or Protection against Inflation) whereby every year at the time of renewal the insured value of your home is automatically increased. Make sure your home fire policy has the PCI option – it costs a tiny bit more, but it’s well worth it for your peace of mind.
In some countries there is a catalogue of values of vehicles, known as the Blue Book, and vehicles are automatically insured at the value shown therein. As a car gets older it is worth less, so on the policy the value is automatically reduced.
In Costa Rica, things are different. INS puts the onus on owners to insure their vehicles at Actual Cash Value (ACV), that is to say, market value in Costa Rica. There is a Blue Book, and its use is “advisable,” not compulsory – but if the proposed insured value of a car is substantially different from the Blue Book, INS often rejects the insurance application. And when it comes to paying, INS will never (or hardly ever) settle a claim based on a value greater than that shown in its Blue Book, so it’s a waste of effort to try to insure a different value.
Most of the time the ACV goes down as the vehicle gets older. But sometimes, when the colón is devaluing faster than the vehicle is depreciating, the ACV of the car expressed in colones goes up. Common sense would indicate that insurance companies should automatically adjust insured values to conform to the Blue Book, but INS does not.
This means that you, the insured, should be aware of the ACV of your car.
Apart from consulting the Blue Book, the usual way is to see the price of similar vehicles in the classified ads in The Tico Times or the daily La Nación, and shave a tad off. The Web site www.crautos.com also lists lots of used vehicles.When the insured value varies a lot from the ACV, you should adjust the value by means of a signed form – contact your insurance agent to do so.
The Plan 16 medical policy, very popular in the 1990s, is in colones, and is geared to offset inflation and devaluation (TT, Dec. 22, 2006). INS has a list of the amounts it will pay for each foreseeable type of medical treatment, doctor’s visit, surgery, lab work, etc., and it updates it every year to compensate for inflation so that doctors, labs and medical providers receive adequate payment.
But INS did not increase the total amount of coverage (the maximum it will pay out for your health in the calendar year) until 2007, and the increase was insufficient to compensate for accumulated inflation, so the current situation is critical for several reasons:
1) Doctors and hospitals are getting well paid for treatment of minor ailments, but if a patient has an expensive ailment, they often refuse to accept the insurance because the cost of the treatment might exceed the amount of total coverage, which means that there would probably be much delay before they got their money in full;
2) the maximum coverage, ¢10 million as of Jan. 1, is equivalent to only about $19,400, which is not enough to cut the mustard, so in the case of expensive treatments the patient would have to make up the shortfall himself; and
3) the ratio between premiums and the insured amount has decreased alarmingly – in fact, elderly people could self-insure by withholding only two to three years’ worth of premiums. The option is to change to a dollar-based medical policy – but that is not the subject of today’s column.
This policy is based on a list, prepared by the homeowner, of all his or her household effects. INS indicates that the list should include the ACV, in colones, for each item.
Making up the list is quite tedious for the homeowner, and the tedium is repeated whenever the values need to be updated. In these inflationary times, they should be updated every year or two, though it is advisable to do so more frequently in times of even higher inflation.
To create or update the list, you must be aware of the used market value for each item. In general, people ballpark the values, aided by ads for similar items in the newspapers, and sometimes by garage-sale values.
To update their lists, people often empirically add X% to the value of each item. As the premium of the home theft policy is based on the sum of the values of your household items, people often understate the values to save a buck on the premium. But if you are dramatically underinsured and an item is stolen, INS will pay whichever is lower, the value stated on the list or the garage sale value – so try to get the values reasonably exact.
Having said that, let me dispel some of your dark suspicions: as INS is a government institution, it is not overly worried about its bottom line, so, while it does not easily allow itself to be swindled, it is not out to nickel-and-dime people by underpaying claims.
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