Would you finance something years before you get to use it?

Loss of assets through fire, theft, and accident are regarded as risk events with a relatively low occurrence rate. The risk is spread across thousands of policyholders, with each one chipping in a small contribution to cover the occurrence of a handful of losses. That's the principle of insurance.

Insurers generally don't offer cover at new replacement value for assets that are subject to wear and tear and that depreciate in value over time, such as motor vehicles, machinery and electrical equipment. In fact, insurers will only cover such assets for sudden loss events such as fire, theft, accident etc. but not for loss due to having reached the end of their useful life. Additionally, insurers will only pay out the claimed asset's residual value and not its replacement value as if new.

Then, why insure hot water geysers that are destined to fail around 6 - 10 years after going into service? The answer is simple: because it's a profitable business model for the insurer.

Geyser failure is 100% certain, making geysers a highly calculable risk. Depending on water quality, operating temperature and the number of heating cycles, a geyser typically fails after 7 - 8 years on average, when it can no longer hold water due to corrosion and cracking of its critical components. Insurance companies manage claim ratios by adjusting premiums, limiting cover and increasing geyser excess.

Technically, geyser failure itself cannot be regarded as a risk event because it actually is a surefire event. The risky part is the magnitude of consequential damage to ceilings, flooring, furniture and other assets from water flowing uncontrollably when a geyser leaks or "bursts" (the latter sounds more dramatic).

In calculating the geyser premium, insurers assume that every geyser in a given complex will fail in the medium term and that resultant damage to the unit as well as claim-related costs will be incurred. Needless to mention, a profit markup is also included to make it worthwhile for the insurer. 

Additionally, geyser claims have a negative impact on the body corporate's claims ratio which in turn will influence premium and excess adjustments by the insurer.

Effectively, paying for geyser insurance is tantamount to financing something long before it becomes yours. It simply makes no sense.

So, what are the alternatives to geyser insurance?

Reserve Fund

Rather than paying into its insurer's pockets, the body corporate can budget for the inevitable geyser replacement by including it as a line item in the 10-year maintenance, repair and replacement plan. Being part of the reserve fund, this contribution earns interest and doesn't need to cover insurer profit.

Mono offers a free and interactive 10-year maintenance plan to schemes that chose to exclude geysers from cover.

Service Plan

Not only must the body corporate make provision for geyser replacement but it must also take measures to avert consequential damage caused by "burst" geysers. This is achieved through periodically servicing all geysers and installing early-warning devices that alert homeowners to impending failure. In any event, the service technician will also be able to point out geysers that are near the end of their useful life.

Mono's service plan is the most cost-effective option available and includes a 15% discount on new geyser purchases and installations.

Install better geysers

While the initial cost of a stainless steel geyser is higher than that of a conventional geyser, it lasts substantially longer (up to four times) and the service costs are significantly lower.

Conclusion

By implementing the above recommended measures, the body corporate will save money in the medium term and greatly improve its claims ratio, enabling it to negotiate a more favourable insurance premium.