Unwittingly, too many businesses are risking their survival and making it very difficult to bounce back successfully from a major loss.
The problem is underinsurance, and insurers, brokers and their clients need to work together to ensure that when a loss occurs the insurance in place will respond effectively and get the business back on its feet quickly.
In today’s tough economic climate, many businesses are not prioritising the valuation and risk assessment aspect of their insurance programme, fearful that it may lead to higher premiums.
Across many different market sectors and varying lines of business, underinsurance is rife and when a claim arises the impact can be disastrous.
If sums insured are only 75% of what they should be, then insurers can apply that percentage to any claim. This ‘application of average’ can see underinsured businesses face a shortfall in their insurance payout and leave them with an unexpected and often sizeable bill.
Indeed, the issue has become such a concern for the British Insurance Brokers’ Association (BIBA) that it is publishing a booklet focusing solely on underinsurance later this year.
“We are in the process of writing an underinsurance guide and one version will be industry facing and the other will be for the SME market,” explained Graeme Trudgill, Head of Corporate Affairs at BIBA. [https://www.biba.org.uk/]
He added: “I think it is difficult during hard economic times to get the client to buy the fullest and widest insurance portfolio. If people have not had a claim before then it can be difficult for them to see just how much of an impact underinsurance can have on their business. There is always a big push to go on price, but it is a false economy.”
The widespread nature of underinsurance in the property market was underlined by research carried out recently by the Building Cost Information Service, which is part of the Royal Institution of Chartered Surveyors. It found that 80% of commercial properties are underinsured.
In similar work, the Chartered Institute of Loss Adjusters found that 40% of business interruption policies are underinsured with the average shortfall being 45%.
Changing values
The problem for many businesses is that getting the right sums insured is often complex and the values in question can change quickly.
When it comes to business interruption, for example, the definition of gross profit is not consistent between insurers and accountants and this can immediately lead to problems. Accountants will generally strip out things like staff and utility costs whereas insurers will not. Businesses also tend to underestimate how long it will take to get back on their feet and the standard business interruption indemnity period of 12 months is simply not enough.
In the property market, there is often confusion between the market value of a property and its rebuild cost. Charges for building materials and labour also change regularly and many businesses forget to include the fees for removing debris and clearing the site before a rebuild even starts. Where a business does not get on top of these issues, then its sums insured are unlikely to be accurate.
Underinsurance is also prevalent in the plant and machinery market. The lead times for bespoke machinery are often longer than expected and when plant is coming from overseas, the impact of currency fluctuation also has to be factored into the equation.
There are then the logistics around transportation and installation to manage and the cost and timescales for both can be highly variable, often rendering sums insured and indemnity periods inappropriate.
Carrying out valuations regularly will not always result in premiums going up and it is not unusual to find that the sums insured are too high and actually need to come down.
Even if the sums insured go up or indemnity periods are increased, the impact on the premium is often less than imagined.
For example, increasing an indemnity period from 12 to 24 months does not simply double the premium and such widely held misconceptions are damaging to the market and the underlying security of the client.
Once a loss has occurred, it is too late to avoid the negative impact of underinsurance and this is why it is so important to get the right sums insured at renewal.
[Courtesty of Zurich Insider]
