In Depth: Underinsurance - data, analytics and trading

With around three quarters of properties underinsured, it’s time for the insurance sector to take some of the guesswork out of determining how much cover is needed. By using more data and analytics within the underwriting process, policyholders can have greater certainty the sum insured is accurate and they’re covered if they do need to make a claim.

“The conventional process of asking a policyholder to set the sum insured doesn’t work,” says Jason Chambers, head of underwriting automation, at Aviva. “It’s really difficult for a business owner to know what this figure should be, which increases the risk that they’re not appropriately insured. They need more certainty.”

Placing the onus on the policyholder to work out the sum insured does little for the sector’s reputation either. “Leave the policyholder to set the sum insured and there are only two ways they can find out whether they got the figures right,” says Josh Bedford, client director at Konsileo. “By suffering a loss, which is too late to discover they were wrong, or by paying for a professional valuation, which many won’t want to do.”

Data insight

Fortunately, a third way is emerging. By using more data and analytics to provide insight into the risk, brokers are able to have a more informed conversation with their clients about sums insured and underinsurance.

As an example, Aviva is using its own data as well as additional information from partners to identify potential underinsurance. “We can identify what the building attributes are and its square footage which enables us to assess whether there is a risk of underinsurance,” explains Chambers. “This information is then shared with the broker who is able to discuss cover requirements with the client. It’s much more compelling when a client is presented with information that is relevant and personal to them than simply telling them they need to review their cover.”

Where a significant level of underinsurance is identified, Aviva will recommend a review. “Where we have strong confidence that a property is underinsured we will outline the reasons and recommend they review it with a desktop survey,” adds Chambers. “Offering this solution makes it easy for policyholders to have the right level of cover.”

It also supports brokers. Rather than having to stick the underinsurance message on repeat, this data enables them to target their activity to clients who need to revise their sums insured. This can open up the underinsurance conversation and create an opportunity to review a client’s entire portfolio to ensure cover is accurate.

Conversation starter

Providing this more detailed insight is a step that’s welcomed by brokers. Chris Cotterill, client director at Konsileo, says that where an insurer provides data to help determine a rebuild value, it makes a good starting point for conversations about underinsurance. “Clients don’t always take the advice they’re offered but these tools do make them question what the sum insured should be,” he explains. “We’d supplement this with examples of claims to educate clients about the importance of having the right level of insurance.”

Neil Grimes, claims director at Clear Insurance, agrees, saying it makes sense for insurers to tap into the data they hold. “Claims data is an obvious source for this insight. Insurers will know exactly how much it costs to rebuild a four-bedroom house, for example, so why not use this information across their customer base? Combining this with data from external sources to offer clients guidance on whether they’re underinsured is a positive step. It’s much more of a prod for the client to look at it.”

Taking this more proactive approach has already delivered results. As an example, Chambers points to one broker client who had a sum insured of £10m across three properties. By analysing the data it held, Aviva was able to show there was a strong probability of underinsurance, prompting the client to seek a valuation. As a result of this the sum insured was increased to £16m.

While this is one of the more extreme examples, this exercise has helped to address £250m of underinsurance through uplifts in sums insured. “This is really positive for these policyholders,” adds Chambers. “But there is still significantly more underinsurance out there.”

Adding value

While brokers are positive about the use of more objective data to help their clients avoid underinsurance, there is some caution. “It has to be used in a way that will help clients,” says James Woollam, managing director of Hayes Parson. “If it can be used as a tool to help clients understand something they didn’t know about their property, that’s really positive. Data mustn’t become a way to increase premiums.”

As the use of data and analytics to flag up underinsurance increases, Grimes would also like to see more education on why it’s important to have the correct sum insured. “No one understands the implications of being underinsured unless they’ve had a claim and found out the hard way,” he says. “We’re always explaining what the implications are to clients but a broader campaign would help to persuade more people to start right with a professional valuation. Everyone just assumes that the figure they get in their renewal is accurate: they don’t understand that they need data, whether that’s a valuation or financial figures from accounting software, to be sure they have accurate sums insured.”

Better than average

Using data to validate the level of cover taken out has another advantage too. Certainty over the figure means that the insurer can remove average and give the policyholder the peace of mind that if they suffer a loss within the terms of the policy, it will be covered.

This is beneficial for all three parties. In addition to building trust, using data and technology can also enable a much smoother claims process. David Flandro, head of analytics at Howden, says that as well as helping to drive down administration costs by paying some of the simpler claims automatically, it can also streamline more complex claims.

“Nobody wants to underwrite at the point of claim; during the pandemic, the insurance sector saw a lot of disputes as a result of this,” he explains. “If an insurer can use data and technology to ensure an accurate assessment of risk at outset, it leads to more streamlined claims. This is beneficial from a cost perspective but it also leaves room for the personal touch, with the broker and insurer able to focus on helping the client recover from the loss.”

Taking out this uncertainty at the point of claim is welcomed by Grimes. “It’s soul destroying to have to tell a client that average has been applied to their claim,” he says. “Anything that can remove the risk of underinsurance and make claims smoother has to be positive.”

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