BLOG: A perfect storm for underinsurance?

Not a day goes by without a newspaper headline reminding us that not only are we still suffering the aftershocks of the pandemic, but we’re also witnessing accelerated inflation, supply chain chaos, rising energy prices, political instability and a bitter conflict waging in Eastern Europe.

Whilst we can all see the tangible impact of these factors in the form of empty supermarket shelves, queues at fuel pumps and spiralling bills, very few people consider how these global issues will also impact their insurance premiums, particularly high net worth individuals.

It’s a fact that the implications of underinsurance have plagued the insurance market for decades, but in the current climate, I would argue, it is more important than ever for brokers and their clients to work together to ensure their property and possessions are adequately covered should the worst happen.

And the worst certainly seems more likely to happen now than ever before.  As the unprecedented flash floods in London last year demonstrated, many properties that were previously considered low risk are now firmly in the danger zone thanks to climate change, with flooding increasingly a case of when, not if.

The vital role of the high-net-worth broker
Many homeowners don’t give their property value a second thought unless they happen to be buying or selling, at which point they are likely to be well aware of what their property is worth. This cost of sale value is often what a policyholder declares when obtaining a quote for their home insurance, they may continue to use this same figure at each renewal for upwards of twenty years while they remain comfortably settled in their home. This is where difficulties rise, and where high-net-worth brokers have a vital role to play in ensuring their clients are properly indemnified.

Many homeowners confuse the market value of their property with the value to be insured. This is not a great measure to use as the actual cost of rebuilding a property is likely to be significantly different to its market value; particularly at the moment and if the home has been owned for a number of years. This leaves the policyholder at greater risk of being underinsured and suffering financial harm as a result.

What we are seeing is a perfect storm for underinsurance
Very few policyholders will consider, much less understand the various costs that can contribute towards the reinstatement value of their property, but it is more than the mere cost of bricks and mortar and labour.

Rising fuel prices significantly add to repair costs. Over the past two years alone we’ve seen a 33% increase in transportation costs, which shows no sign of slowing; it now costs in excess of £2,000 to fill the tanks of a typical articulated lorry. The reduction in eligibility for ‘red diesel’ has also impacted the construction industry who previously enjoyed this privilege.

Wider energy costs continue to spiral, with another large increase in wholesale prices expected in the autumn, this add to producers’ costs further, particularly manufacturers of brick, steel and cement.

The war in Ukraine has also had a knock-on effect on the availability and cost of raw materials and labour. Due to sanctions, materials such as copper, aluminium, bitumen and timber are increasingly difficult to source, leading to price increases. It is also estimated that Ukrainian and Russian nationals comprise 15% of the merchant shipping workforce, the war has decimated crews, leaving ships unable to sail and long delays for supply chains.
This is all before we get to the rate of inflation, which is expected to exceed 10% by the end of this year.

All these factors combine to create a mix of shortages, which in turn drive up prices, or cost increases as we’re seeing in the energy market. In practice, this means that everything costs significantly more, especially the cost of rebuilding or repairing a property, in addition to significant increases in the cost of replacing damaged possessions. What we are seeing is a perfect storm for underinsurance.  

Reinstating security
When a policyholder makes a claim, they expect to be indemnified for the damage (or destruction) of their property. They do not expect to be told that their insurance premiums will only get them so far, but the maelstrom of factors outlined above will invariably lead to reinstatement costs that greatly exceed the stated value of the property leaving them to bear the additional costs themselves.

We encourage our Private Clients brokers to have open and regular discussions with their high-net-worth clients about these issues, highlighting the rising construction and materials costs, helping them to obtain an accurate valuation of their sums insured at regular intervals and searching to find the right insurance product to meet their individual needs.

Our tailored, flexible high value home insurance solutions have been carefully designed by experts to meet the specialist needs of high net worth individuals and their properties and possessions, backed by a panel of UK-based rated capacity providers.
We can help you ride out the storm, get in touch with us to find out more.

Amie Wright, Private Clients Team Manager