Blog: The rising threat of underinsurance

We’re living through a difficult period in our country’s economic history. The cost-of-living crisis comes at a time when we’re still dealing with the lasting effects of Covid-19, Brexit and the ongoing war in Ukraine.

At the same time, we’re seeing inflation rising, increasing fuel and energy prices, and this is having a significant impact across everything including building materials and supply chain issues. All of this is impacting the prices we pay and how long it takes for goods and materials to get to where they’re needed. So, what does this all mean for insurance?

From our own modelled data, we estimate that 50% of UK businesses are underinsured to some degree, and 40% of policies with buildings have at least one premise suspected to be underinsured by 20%.

And it’s not just us seeing it. A number of our Specialist Partners are also reporting worrying statistics. From over 4800 property surveys that Barrett Corp & Harrington have carried out this year, more than 75% have been underinsured, with an average increase suggested at 53%. In addition, Charterfields note that 42% of plant and machinery locations are being underinsured by more than 50%3.

The risks of underinsurance are not always clear but, put simply, having incorrect building and property values declared as part of an insurance policy and subsequently suffering a loss, may result in a property being considered as underinsured

This isn’t a new topic.

However, if the current global situation continues then more and more businesses may find themselves underinsured, or with incorrect business interruption periods based on the time taken to rebuild property or replace critical machinery . This has the potential to create a severe exposure to the future of their business if an incident occurs, at a time when they will need all the help they can get to ensure the business continues to survive.”

Data and risk management

It’s clear that insurers and brokers need to work together to provide the best possible outcome for the customer. Jason Chambers, head of underwriting automation, at Aviva, has discussed how the insurer is using data and automation to accurately identify underinsurance risks.

Chambers has commented: “Our underwriters are well placed to work with our broker partners to help tackle underinsurance in the market today. Through data-led insights they can access via our Commercial Intelligence Tool, they’ve assessed more than 55,000 policies in the last 12 months alone.

“We know the risk of underinsurance is increasing in today’s market. But it’s our role to work with brokers to actively tackle the problem, not just talk about why it’s happening.

“Our underwriters are working with brokers to identify the customers most at risk from buildings underinsurance and where Business Interruption indemnity periods aren’t high enough – in some cases, we can be confident enough to recommend what the new limits should be set at. Our underwriters can even advise where a customer’s exposure has not materially changed for four or more years.

“It’s then about presenting and sharing that information in a personalised and clear format for the broker to share with the customer, supporting a conversation with hard data so they can make an informed decision.”

As Jason mentions, our underwriters are now accurately identifying cases – and recommending limits for some – but for most, knowing how much you need to be covered for can be really tricky.

Ensuring values and rebuilding periods are accurate, and that up-to-date valuations are completed, underpins the basis of risk assessments and any risk transfer mechanisms, such as insurance. It helps with evaluating and setting indemnity and maximum indemnity periods. It also helps address the exposures created to an organisation of underinsurance and over-insurance, when declared values are incorrect

We recommend that formal valuations for buildings, plant, machinery, and contents are regularly undertaken, and this is increasingly important in the times we currently find ourselves in. Through our relationships with Specialist Partners such as BCH and Charterfields, customers are able to access full Royal Institution of Chartered Surveyors (RICS) compliant, reinstatement and cost assessments, as well assessments of plant, equipment and contents, at preferential rates.

We also have a number of guides and resources that can help the customer to understand what needs to be considered, including what should be included in Property Rebuilding Costs. I’d recommend looking at the ‘Business Interruption: Rebuilding Period and Rebuilding Valuation’ Loss Prevention Standard’.

To access the Business Interruption Loss Prevention Standard, or to find out more about Aviva’s Specialist Partner network – including BCH and Charterfields – search Aviva Risk Solutions online.

Chris Andrews is director of risk management solutions at Aviva

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