The annual insurance renewal process can be a tricky time for brokers and their clients. With the market only showing vague signs of softening in some areas, favourable terms and competitive prices are harder to come by, and many customers will be feeling the pinch of sharpening rates.
Brokers need to work smarter to navigate the market to find the best possible protection for their property-owning clients, but to do that, and give clients full confidence that their property is covered, they must be pushing for up-to-date valuations to avoid the risk of their clients falling victim to underinsurance.
A recent survey by rebuildcostassessment.com revealed that more than 9 out of 10 UK buildings are insured for the wrong amount, with 80% subject to underinsurance. The valuation specialist estimates commercial underinsurance to be worth around £340 billion.
This figure should concern all of us across the insurance value chain, but it should also prompt us to work together to ensure that our clients are protected and not subject to unexpected financial hardship should the worst happen.
Why now?
Whereas materials and labour prices naturally fluctuate from year to year, in the current global climate; the lingering effects of the pandemic, ongoing supply chain crisis, conflict in Eastern Europe and rocketing energy prices mean that the cost of reinstating property following an incident is likely to greatly exceed the sum insured. In short, commercial property owners could be facing a hefty bill should their premises be damaged.
Some of the biggest factors driving up costs are:
- Rapid inflation, expected to exceed 10% by the end of this year.
- Spiralling energy costs driving up the cost of manufacturing of building materials such as steel and timber.
- Labour shortages due in part to Brexit, but also the conflict in the Ukraine.
- Rising fuel costs, diesel is now over £8.00 a gallon, increasing transportation costs for materials.
- Difficulties in finding materials such as bitumen and copper as global sanctions bite.
These movements won’t be factored into sums insured valued 18-24 months ago, or even 12 months ago. Many property owners will be working from outdated market valuations, or declaring sums insured derived from net book values, the value of a fixed asset as entered into the company accounts. Historic values are not an accurate basis on which to calculate rebuild costs for a client’s building as they cannot account for the unprecedented changes in costs, or disruptions to the supply chains we are seeing today.
Many property owners use net book values to calculate their sums insured, or simply choose to renew at the same values as the previous year, unaware that the actual reinstatement value of their property could be a great deal more - they may get the cover they think they need more quickly, but without an expert valuation, they could be heading for an expensive shock further down the line.
Don’t underestimate underinsurance
Underinsurance has always been a widespread problem for our industry but as the economic crunch deepens, we want to make sure our brokers and their clients aren’t exposed to unnecessary hardship.
The past few years have been incredibly difficult for so many commercial businesses and property owners. Our message is to make sure that clients with commercial property are obtaining accurate, up-to-date valuations to ensure that should the worst happen, they are not subject to additional costs if their property isn’t covered for the full reinstatement value - it doesn’t pay to underestimate underinsurance.
Aaron Woodhams, Chief Underwriting Officer
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