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Blog: Inflation and underinsurance – the silent claim assassins

Lee Goodwin

It is no secret that the UK economy is subject to inflationary pressures, causing prices to rise in many industries but, in the construction sector, rampant inflation is having a particularly significant and insidious effect.

The rising cost of material damage reinstatement claims for incidents such as fires and floods are leaving home insurance policyholders with a silent and deadly problem.

The Office for National Statistics advises that the Consumer Prices Index (CPI) rose by 10.1% in the 12 months to July 2022, however according to the Federation of Master Builders’ State of Trade survey, builders have seen material prices increase by as much as 25% and labour costs by 30% in the same period – nearly three times the national average.

A shortage of skilled labour and material availability is creating havoc with the reinstatement sector, and having an adverse effect on policyholders and their claim settlements.

If you apply the current rates of inflation seen in the construction industry to the material damage sections of a policy, this is leaving sums insured significantly short of where they need to be, even if they were reasonably accurate 12 months ago at inception.

From working with brokers and handling thousands of property claims each year, we are seeing first-hand that many homeowners in the UK are underinsured without realising. According to insurance broker Macbeth, some 80% of UK properties are underinsured. That’s four out of five. On average in the UK buildings are insured for only 68% of the amount they should be.

Underinsurance may provide policyholders with a slightly cheaper premium each year, but it doesn’t cover them adequately for the value they need, and they’ll be responsible for the shortfall, not the insurer.

The industry has a moral obligation to do more to educate policyholders on the problem and offer them the opportunity to increase their level of cover mid-term not just at policy renewal. Communicating the issue to them is easy given the media available.

The bottom line is this is an opportunity to increase revenue. An increase in cover usually means an increase in premium for brokers and their principals, so it’s a win-win for both parties.

According to the Association of British Insurers, £226bn of active policies may experience some underinsurance issues in the event of a claim. Policyholders do not usually understand the full implications of being underinsured, which can mean they are more inclined to blame brokers in the event of a reduction in their settlement value.

One way to avoid this is for brokers to obtain accurate rebuild sums from a Royal Institution of Chartered Surveyors accredited loss assessment firm with qualified in-house surveyors. This value-at-risk service enables brokers to ensure policyholder sums insured are accurate, and minimises the chances of ‘assassination’ of the resulting claim settlement.

To find out more visit: www.oakleafe.claims

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