South African inflation has done quiet damage to commercial insurance programmes that most business owners only discover when they claim. Construction costs are up roughly 28% since 2023, according to Construction Industry Development Board indices and broker market data. Industrial equipment replacement values are up 22% over the same period, tracking Statistics South Africa producer price inflation data. Commercial property rebuild costs have risen 19% across the major metros. Vehicle replacement prices for commercial fleets are 24% higher than they were three years ago. And in almost every case, the sum insured on the policy has not kept pace.
The result is a structural underinsurance problem that affects the vast majority of SA commercial insurance programmes. A business that thinks it is fully covered for a R30 million property loss often discovers, at claim time, that the actual rebuild cost is R38 million, the policy responds proportionally, and the business absorbs the gap. For some SMEs, that gap is the difference between surviving the loss and closing the doors. All cover discussed here is subject to underwriting and final policy wording.
TL;DR
- SA construction and replacement costs have risen 19 to 28% since 2023, but sum insured values on most commercial policies have not been adjusted to match.
- The “average clause” applies proportional payouts when underinsurance is detected at claim time. A 25% underinsurance gap reduces a R10 million claim payout to R7.5 million.
- Cost-cutting on insurance premium is the most common cause of underinsurance, but the saving is typically R5,000 to R20,000 per year for businesses that then absorb six-figure rand losses at claim time.
- Business interruption sums insured are even more commonly underinsured than property values because they require active calculation rather than a building valuation.
- An immediate sum-insured audit, costing nothing, can identify exposures that would otherwise only surface at a claim. Most SA businesses are 15 to 30% underinsured today.
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The scale of the underinsurance problem in SA today
Underinsurance in the SA commercial market is not a small problem. According to research published by the South African Insurance Association, more than half of all SA commercial property policies are underinsured by at least 15%. For the businesses most affected, it is much worse. A property valued and insured at R50 million in early 2023 should be valued and insured at approximately R60 to R64 million today, simply to keep pace with construction cost inflation. Most have not been revalued in that period.
Three forces have driven the gap. First, raw material costs (steel, cement, bricks, glass, copper) have all moved sharply higher between 2023 and 2026. Second, the rand’s volatility against the dollar and euro has pushed up the cost of imported components, fixtures, plant, and equipment. Third, contractor and trades labour costs have risen as the post-2024 infrastructure spend has tightened the construction labour market.
The compound effect is that a property or business asset insured at a 2023 valuation is materially underinsured against a 2026 loss event. The policy will still pay out, but it will pay less than the rebuild or replacement actually costs. The shortfall lands on the business owner.
How the average clause actually works at claim time
The average clause is a standard provision in SA commercial property insurance policies, recognised in the regulatory framework administered by the Financial Sector Conduct Authority. It applies the principle that the insured should pay premium on the full value at risk, and where they have insured for less, any claim is reduced proportionally. The mechanics are arithmetic:
Claim payout = (Sum insured ÷ Actual value at risk) × Loss amount
A worked example for a Sandton commercial building:
- Actual rebuild value in 2026: R40 million
- Sum insured on policy (last reviewed 2023): R30 million
- Underinsurance ratio: 75% (R30m ÷ R40m)
- Loss event: R10 million fire damage
- Insurer pays: R7.5 million (75% of R10 million)
- Business absorbs: R2.5 million shortfall
The example assumes a partial loss. On a total loss, the gap is even more severe. The R10 million the business expected to claim is reduced by R2.5 million, not because the insurer is being difficult but because the policy mathematics has always worked this way. The only protection against the average clause is to maintain accurate sums insured.
Some specialist commercial property policies remove or modify the average clause, replacing it with a “first-loss” or “agreed value” basis. These are typically more expensive but provide certainty at claim time. For businesses that cannot accurately value their assets each year, they are worth investigating with a broker.
Sector-by-sector underinsurance impact
The underinsurance gap is not uniform across SA business sectors. Where the inputs have risen fastest, the gap is largest.
Commercial property and offices
Office and retail property rebuild costs have risen approximately 19 to 22% since 2023 across SA metros. The gap is widest on properties with high specification, glazing, or imported finishes (Sandton CBD, Cape Town Atlantic Seaboard, Umhlanga). A 2023 valuation on a high-spec building is likely 22 to 25% below current rebuild cost. Commercial property insurance should be revalued every two to three years at most, and annually for high-value or specialist sites.
Construction and engineering
Project values on multi-year construction contracts are particularly exposed. A contractor’s all-risks policy issued at the start of a 2024 project may have a sum insured 25 to 28% below the actual contract value by 2026 mid-construction. This is partly inflation, partly variation orders that the policy was not adjusted to reflect. The construction insurance programme should be reviewed at each major contract milestone, not just at policy renewal.
Manufacturing and industrial
Plant and machinery replacement values have risen 22 to 26% since 2023, with sharper increases on imported equipment. A 2023 sum insured of R15 million on a manufacturing line is realistically R18 to R19 million today. Specialised plant (extruders, CNC equipment, packaging lines) where lead times are 6 to 12 months adds business interruption complexity beyond the property cost.
Retail and hospitality
Stock and inventory values are seasonal and more dynamic than fixed asset values. A retailer with stock turnover of R5 million per month should review their stock sum insured quarterly. Hospitality businesses (restaurants, lodges, conference venues) face both property and equipment inflation, and their fit-out costs have risen sharper than commercial averages because of specialist finishes and FF&E.
Motor and logistics fleets
Commercial vehicle replacement prices have risen 24% since 2023 (heavy-duty trucks and bakkies harder hit than passenger vehicles). Fleet operators with insurance values based on 2023 acquisition costs are facing meaningful gaps on any total loss. The fix is annual sum-insured review, typically done at fleet renewal but sometimes missed during renewal automation.
The business interruption gap is bigger than the property gap
Property sums insured are at least tied to a tangible asset that can be valued. Business interruption sums insured require active calculation of forward-looking gross profit and standing charges, and they are far more commonly underinsured than property values.
A typical SA SME with R10 million annual turnover and a 25% gross profit margin should carry a business interruption sum insured of approximately R2.5 million per year, scaled by the indemnity period (often 12 to 24 months). After 24 months of inflation and turnover growth, the same business may need cover of R3.2 million per year on the same parameters. Most businesses have not adjusted.
The deeper issue is that BI cover requires the business to identify:
- Gross profit as defined by the policy (often different from accounting gross profit)
- Standing charges that continue during an outage (rent, salaries, finance costs)
- Indemnity period appropriate to the recovery time of the business (12 months is a default but 18 to 24 months is more appropriate for specialised equipment or complex supply chains)
- Increased cost of working cover for funding the recovery itself
Each component drifts upward with inflation. A BI cover set in 2023 is almost certainly inadequate in 2026 unless it has been actively reviewed. See our article on your building’s biggest threat for a deeper look at the property-and-BI combination on commercial real estate.
Why cost-cutting on premiums backfires
The cost-of-living pressure on SA businesses is real. Margin compression, fuel prices, energy costs, and stagnant consumer spending have forced many businesses into expense reviews that include insurance premium reduction.
The arithmetic of cutting insurance is unforgiving. A typical sum-insured reduction of 20% on a commercial property policy might save R3,000 to R8,000 per year in premium. The exposure created by being 20% underinsured is, on a R10 million loss event, R2 million absorbed by the business. The ratio is several hundred to one against the business.
The same logic applies in less obvious places:
- Dropping business interruption cover entirely. Saves R5,000 to R15,000 per year. Exposes the business to the full revenue loss during any property-driven outage, typically R500,000 to R5 million depending on size.
- Reducing the indemnity period from 18 to 12 months. Saves perhaps R2,000 per year. Exposes the business to 6 months of uncovered loss in any significant claim where recovery exceeds 12 months.
- Removing public liability or professional indemnity extensions. Saves a few thousand rand. Exposes the business to claims that previously cost nothing to defend.
- Letting the renewable energy extension lapse on a property policy. Saves under R1,000. Exposes the business to surge damage, panel theft, and inverter failure on installed solar systems that have themselves become substantial assets.
The principle to apply at every cost-review conversation: any insurance saving smaller than the deductible on the cover being cut is almost always a net loss in expected value over a 5-year period.
How to audit your sums insured this month
A sum-insured audit is a structured exercise that takes 2 to 4 hours for a typical SME, and it costs nothing. The output is a list of every material insurance value on the programme, the date the value was last reviewed, the actual current value, and the gap. Working through this exercise reveals the underinsurance map for the business.
Six steps:
- Property building values. Obtain a recent professional rebuild valuation (or use an indexed update from your 2023 valuation, adjusted by approximately 20% for SA average commercial inflation). Compare to the policy sum insured.
- Plant, equipment, and contents. Pull the fixed-asset register, age each item, apply the appropriate replacement cost factor. Imported equipment requires current exchange rate adjustment.
- Stock and inventory. Use the average stock balance from the last 12 months, not the 2023 figure. For seasonal businesses, use the peak balance.
- Business interruption. Recalculate gross profit from the latest financial statements, scale by the indemnity period, and add increased cost of working.
- Vehicle fleet. Update each vehicle to current replacement cost, not original acquisition cost or book value.
- Specialist extensions. Review sub-limits for cyber, public liability, professional indemnity, fidelity guarantee, machinery breakdown, and any sector-specific covers. Each may have its own underinsurance pattern.
For SA businesses unsure how to approach the audit, the business insurance checklist is a starting point. A broker review can complete the exercise systematically and identify which covers need adjustment versus which are appropriately sized.
Cover structuring options that fit tighter budgets
The cost-of-living pressure is genuine, and not every business can simply increase premium spend by 20% to match inflation. There are structural options that maintain protection while managing premium impact:
1. Higher deductibles in exchange for matched sums insured. Raising the deductible from R10,000 to R50,000 typically reduces premium by 8 to 15%, freeing budget to push sums insured back to accurate values. The business retains a slightly higher small-claim cost in exchange for protection against the catastrophic gap.
2. First-loss cover on selected assets. Where a single total loss is improbable (large stock spread across multiple sites, fleet vehicles geographically dispersed), first-loss cover insures a realistic maximum loss rather than the full value, at lower premium. Works for specific risk profiles, not all.
3. Annual sum-insured indexing. Building automatic indexing into the policy (typically CPI or a construction-cost-specific index) prevents the gap from re-emerging year over year. Most SA insurers support this; the broker needs to request it specifically.
4. Aggregate-limit policies. Combining multiple covers under a single aggregate limit (property, BI, public liability, employer’s liability) often reduces total premium by 5 to 12% compared with separately-limited cover, while maintaining adequate protection for typical loss scenarios.
5. Quote shopping with care. Comparing premiums between insurers can deliver 10 to 25% savings, but only where wordings and limits are genuinely comparable. Cheaper quotes that exclude key extensions are not savings.
Frequently asked questions
What does it mean for my business to be underinsured?
Underinsurance means the sum insured on your policy is less than the actual value at risk. If your commercial property has a current rebuild cost of R40 million but the policy lists R30 million, you are underinsured by 25%. In SA, the average clause in standard commercial property policies applies a proportional reduction to any claim, so a R10 million loss would pay out R7.5 million rather than R10 million. The business absorbs the gap.
How much has SA construction inflation actually been since 2023?
Construction cost inflation in SA has averaged 8 to 10% per year since 2023, totalling approximately 25 to 28% over the three-year period to 2026. This is significantly higher than headline CPI because construction inputs (steel, cement, glass, copper, contractor labour) have all risen sharper than the general basket. Specialist or high-spec construction has seen even larger increases, driven by exchange rate effects on imported finishes and equipment.
How often should I review my sums insured?
For most SA businesses, sums insured should be reviewed annually as part of the policy renewal process. For high-value or specialised assets (commercial property above R20 million, specialised manufacturing equipment, expensive fleet vehicles), more frequent review is appropriate. Properties in markets with sharp value movements should be professionally revalued every 24 to 36 months. Business interruption cover should be recalculated whenever turnover changes materially or the recovery time profile of the business shifts.
If I am underinsured, can I just claim less than the actual loss?
No. The average clause applies to the claim regardless of how much is actually claimed. If your sum insured is 75% of the actual value at risk, every claim payment is reduced by the same 25% proportion. You cannot avoid the average clause by claiming only the amount your policy can pay; the proportional reduction applies in any partial loss scenario.
Are there policies that do not have an average clause?
Yes. “First-loss” policies and “agreed value” policies remove or modify the average clause, replacing the proportional reduction with a fixed limit or a pre-agreed value. These covers typically attract a higher premium because the insurer is accepting the underinsurance risk. They can be appropriate for assets that are difficult to value accurately, or for risk profiles where a partial loss is the realistic exposure. A broker review identifies whether this structure fits your situation.
What is the cheapest way to fix underinsurance?
The cheapest fix depends on the cause. If the underinsurance is purely inflation drift, the lowest-cost fix is requesting annual indexing on the policy (often available at no additional premium) and updating sums insured at the next renewal. If the underinsurance is from premium cost-cutting, raising deductibles to free budget for accurate sums insured is typically cheaper than increasing the premium directly. If the underinsurance is across multiple covers, restructuring into an aggregate-limit policy can reduce total premium while maintaining protection.
Does business interruption cover need to be reviewed every year?
Yes. Business interruption sums insured depend on gross profit, standing charges, and the indemnity period, all of which move with inflation, turnover changes, and business model evolution. A BI sum insured set in 2023 is almost certainly inadequate in 2026 for any growing or inflation-affected business. The recalculation typically takes 30 to 45 minutes annually and is one of the highest-return reviews on any commercial programme.
Audit your cover this month, before the next claim
Underinsurance is the silent failure mode of SA commercial insurance programmes in 2026. Most businesses do not know they are underinsured until they claim, at which point the gap becomes a permanent cash absorption rather than an insured event. A structured sum-insured audit and a frank cover review are the cheapest insurance work you can do. Contact Berkley Risk or call 011-702-8250 to arrange a programme review structured around current SA replacement costs, subject to underwriting and insurer appetite.
Berkley Risk (Pty) Ltd arranges/places/co-ordinates insurance with licensed insurers. FSP #54407. This article is general information only and does not constitute legal, financial, or regulatory advice. All cover is subject to underwriting acceptance and final policy wording.
