In depth: How to reduce underinsurance through effective risk management

When the industry talks about underinsurance, it’s usually SMEs under the spotlight, but such is the rampant nature of inflation, that underinsurance is a real risk right across economy.

“It’s something every business needs to be aware of, not just SMEs,” says Richard Bevins, director of corporate and risk management at Verlingue.

“Rising inflation, and increasing fuel and energy prices are having a significant impact on price of goods, and how long it takes for materials to get to where they need to.”

This is backed up by research conducted by Aviva as part of its recent Risk Insights Report. The insurer estimates that as many as 50% of the UK’s businesses are underinsured, with more than 40% having neglected to check their cover for three years or more.

In addition, more than a fifth (21%) have either reduced – or considered reducing – their cover in the past year despite UK businesses facing what Aviva calls a “double dose of disruption” with the impact of Brexit factored in.

Changing nature of risks

But it’s more than just inflation. The lockdowns mean that many businesses haven’t had their assets properly valued for several years, and the Covid-19 experience has led many to completely reassess how they work, changing the nature of their risks.

If you are in business in the UK, particularly if you have property or hold stock, you are likely to be experiencing some form of underinsurance.

All this means that if you are in business in the UK, particularly if you have property or hold stock, you are likely to be experiencing some form of underinsurance.

“With the sharp rise in inflation, underinsurance is a critical risk.

"From a risk-management perspective, businesses should ensure they understand the rebuild costs of their property, the time it will take to rebuild, and the availability of contractors. 

"[This is] all bearing in mind the squeeze on supply chains and the reduction in labour,” says Chris Andrews, director of risk management solutions at Aviva.

Valuations

“Any valuation should not be limited to buildings. Consideration must be given to machinery, equipment and stock, as inflation will be having an impact across all a business’s key assets.”

This concern is reflected across the market, and it is starting to make brokers raise awareness with their clients, particularly those with large property holdings.

“It’s a broad problem, and I’ve talking about this since the Covid-19 pandemic. There’s a growing realisation across the broker market that clients with a large commercial property base, or large residential holdings, may not have the correct valuation of their assets,” says Philip Barmby, MD at property surveying firm, Brawdia.

Don’t expect retrenchment

Barmby warns that the cost of everything, from steel and timber to plaster and insultation, has gone through the roof (so to speak), and he doesn’t expect the price increases to ease for another six to 12 months at least.

And when they do stop increasing, don’t expect any retrenchment. The costs of today are likely here to stay, and insurance has to find a permanent and lasting solution – a solution that many are seeking in risk management.

“Brokers have got to fully understand the business and its requirements,” says Ian Clayton, MD of ProAktive Risk Management.

The key to risk management is fully understanding the business, its exposures and then properly putting the insurance programme in place.

Ian Clayton

“The days of making assumptions about risk have gone out of the window.

"The temptation for some brokers was that if they had been placing a certain risk for a while, and they and the insurer accepted the status quo, it was easy to renew year-on-year without really understanding the changing nature of the risk.

“The key to risk management is fully understanding the business, its exposures and then properly putting the insurance programme in place.”

That insurance programme is increasingly leaning in favour of risk management services rather than simply relying on the insurance product. The product is only part of the jigsaw, and a growing number of brokers are adding risk management services to their offering. 

Significant savings

The days of a broker essentially being a salesperson for an insurance product are over. Risk mitigation and management look to be the defining features winning brokers. And when a broker gets that part of the proposition right, it can provide significant savings to a client in the cost of their insurance programme.

“When the workplace is safer, with fewer accidents and claims and less time lost to inactivity, it makes a business more attractive to insurers.

"You want people to be fighting for your risks as then you can start to drive some real financial gains,” says Clayton.

But even when risk management materially improves a business’ operations and attractiveness to the insurance market, convincing clients to pay up more at a time when they are seeking savings, is no easy task.

It's our job to convince them that the safety of their business is about risk management – from the policy to the advice given through to the actual risk management process.”

Paul Wright

“They know it is harder to place some risks, as some markets have shrunk, but that allows us to open up the conversation about risk management,” explains Paul Wright, group risk manager at Marshall Wooldridge.

“The level of engagement depends on the business and the personalities in that business. It’s all about the culture.

There are some who think a lot less about it and it’s often cost-related, so it’s our job to convince them that the safety of their business is all about risk management – from the policy to the advice given through to the actual risk management process.”

It seems more brokers understand that the kind of service business clients are looking for is one that doesn’t just supply cover.

"It’s one that provides a full risk service, seeking to properly understand the business and then seek out the best ways of mitigating that risk and, in the process, avoiding underinsurance.

“Our risk managers, supported by specialist valuation companies, are playing an important part in helping clients accurately set values and better understand the time it will take to rebuild their premises, to obtain specialist machinery and – crucially – to retain their customers,” says Verlingue’s Bevins.

Our risk managers are playing an important part in helping clients set values and better understand the time it will take to rebuild their premises, to obtain specialist machinery and – crucially – to retain their customers.

Richard Bevins

“With costs being heavily scrutinised, investing in thorough risk management processes can provide for a higher level of risk retention to mitigate against rising premiums.”

But for many businesses, risk management is seen as something that is for the benefit of the insurer or even if they can see the personal benefit, it’s just adding extra cost at a time when they need it least.

Real economic value

“The key is helping them understand is showing that there is an impact on the output of their business, a real economic benefit to using risk management,” says Clayton.

He cites the example of client involved in metal working in Sheffield. When they took the client on, it took about 30 weeks from receiving an order to delivering the finished metal to the customer. 

“When we looked into it, we found that the machinery wasn’t in a great state of repair, so we put in place a simple policy to check all the machinery once a week to make sure it was in good working order,” he adds.

“By having that process in place, early issues with the machinery were identified and remedied before they got to a stage where the machinery failed completely. 

"They had to make an investment but six months later, delivery time had dropped to 10 weeks and 18 months after that; down to two weeks. They’ve never made so much money in their lives.”

Catching issues

A simple risk-management process to catch issues before they became catastrophes not only made the client more attractive to the insurance market, it materially improved the productivity and profitability of the business.

It is these real benefits that brokers, and insurers would do well to focus on when trying to pitch the benefits of risk management. 

Underinsurance will always be a problem, but when that problem starts to spread across the entire UK economy, a change in perspective and approach must be found.

For insurance, the answer is already there – in risk management. The path to success lies in being able to convince your clients that the cost of these services is more than a benefit to insurers.

"It’s a benefit to all but as always, it’s down to brokers to make that case and inject a real dose of resiliency into the UK economy.

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