The United Kingdom’s ‘underinsurance crisis’ was already in full swing in 2022, according to statistics from buildings insurance valuation company Barrett Corp and Harrington (BCH). The report, which was published earlier this year, found that the vast majority (75%) of BCH’s customers had significantly underestimated the insurance cover they needed to fully protect their assets. In fact, the company recommended that its clients increase their sum insured by an average of 50% across its portfolio last year.
Unfortunately, the UK’s high inflation environment means that underinsurance continues to be a significant problem in 2023.
Why is underinsurance such an issue?
Underinsurance is the gap between how much cover an insured actually has, and the level of cover they should have to be fully protected against a risk. Whilst underinsurance has always been a problem, securing the correct level of cover at the moment is like trying to hit a moving target, with inflation so rapidly driving up costs. This has been compounded by the fact that many people have been cancelling or reducing their insurance cover as a way of cutting their expenses during the cost of living crisis.
The impact of underinsurance can be absolutely devastating – something that is becoming increasingly clear as climate change-related natural disasters continue to rise. According to global reinsurance firm Munich Re, fewer than 40% of disaster-related losses worldwide were covered by insurance in the first half of 2023 – something that the company attributes to the “large insurance gap that persists in many countries for multiple natural hazards.” Again, this insurance gap is perpetuated by the increasing cost of rebuilding, driven by ongoing construction materials shortages and price inflation, in addition to rising premiums that have left people struggling to afford the cover they need.
The value of valuations
Interestingly, the underinsurance crisis is most acute for high-net-worth individuals (HNWI), says insurer and financial services provider Ecclesiastical. In a recent survey of brokers who provide services to HNW clients, four in five said they believed underinsurance was more of an issue for HNWIs, whilst seven in 10 said that it was a bigger problem for this particular group than ever before.
Buildings and luxury items such as jewellery, watches and art were considered to be most at risk of underinsurance. And 78% of brokers believed that one of the biggest causes of underinsurance was out-of-date valuations, with 73% saying they believed their clients’ insurance cover was based on valuations that were over five years old.
A professional valuation will consider all the various costs involved in completely rebuilding or replacing an asset. For a property, this will include the cost of materials, labour, professional fees, site clearance, demolition and any other important factors. A jewellery valuation will be carried out by a trained expert who will consider aspects such as size, weight, colour, clarity and any imperfections. So, if the asset were to be destroyed or stolen, the client would have the cover they needed to completely replace it and would not be left out of pocket. It also prevents them from being overinsured and paying out extra in unnecessary premiums.
The role of insurance professionals
According to Aviva’s Broker Barometer Survey, 84% of brokers were concerned that at least some of their clients were underinsured going into 2023. This is where we as insurance professionals can add value for our clients by educating them about the need for regular valuations and reviews of their insurance cover to ensure they remain fully protected against risk.
World-leading global insurer and Focus partner, Allianz, provides some steps that brokers can take to educate their clients and contribute to reducing the underinsurance problem:
- Raise awareness with clients
Some clients may be unaware that they are underinsured, or at least the extent to which they are underinsured. Raising awareness of the issue and the impact that it could have on their finances may encourage some clients to increase their insurance cover.
- Encourage regular valuations
As we saw above, many clients are relying on valuations that are years out of date, which puts them in danger of being significantly underinsured. Encouraging them to seek regular valuations from an expert valuer will help ensure that sums insured are completely accurate.
- Explain the terminology
From sums insured to limits of indemnity, insurance policies and wordings can be complicated for lay clients. The Consumer Duty, which was introduced on 1 August, stipulates that consumers should receive advice and communications that they can understand. Helping your clients understand the exact terms of their policy and how much they are insured for is key to preventing underinsurance, in addition to keeping you compliant with the new regulations!
Always happy to talk
At Focus, we’re always on hand to talk about your clients’ insurance needs and ensure they have access to competitive, generously worded policies that meet their needs. To talk through your case, simply give us a call on 0345 345 0777 or email firstname.lastname@example.org.