05

A Guide to Underinsurance

What is underinsurance?

Underinsurance occurs when cover is set too low to adequately meet a policyholder’s needs – whether that is a sum insured, limit of indemnity or maximum indemnity period. It can occur across most policy types, potentially leading to reduced claims settlements and jeopardising a policyholder’s ability to recover following a loss. With the correct support and guidance, the risk of underinsurance can be significantly reduced, as this guide demonstrates.

 

Property

Cause of underinsurance

Solution

Valuations approached from the wrong starting point – e.g. reinstatement vs. indemnity

Know what the basis of settlement is before determining any values – this can vary between different sections of the same policy

Misunderstandings over what information is required - e.g. rebuild vs. market value

Understand how to correctly approach each calculation and what information to use

Valuations out-of-date – not conducting regular reviews or responding to changes

Conduct regular professional valuations and always discuss any material changes with your insurer – e.g. extensions, renovations, new purchases

Key Fact

Up to 80% of the UK’s commercial properties are thought to be underinsured!

Source: BCIS

 

Business Interruption

Cause of underinsurance

Solution

Misunderstandings over key policy terms – e.g. an accountant’s definition of ‘gross profit’ vs. ‘insurable gross profit’

Develop a business continuity plan, which will give you much of the key information needed

Wage roll and other costs routinely excluded from sums insured when they should be included

Understand how to accurately calculate sums insured

Insufficient indemnity periods chosen

Use an insurers BI calculator to avoid underinsurance on both sums insured and indemnity periods

 

Liability

Cause of underinsurance

Solution

Setting limits in line with statutory or contractual minimums, without assessing the organisation’s own needs

Ensure you meet minimum requirements, but primarily set limits in line with the organisation’s own needs

Forgetting that a single incident can often involve multiple claimants

Ensure limits are sufficient to sustain multiple claimants, and consider the effects of any aggregate or inner limits

Claims inflation and the impact of recent changes to the Personal Injury Discount Rate (Ogden Rate)

Factor in contingencies for future claims inflation and immediately review current limits following changes to the Ogden Rate

Key Fact

The Ogden rate change has now seen single claimant injury claims exceeding £10m

Source: Zurich’s Excess Layers Claims Guide

 

How to avoid underinsurance – a guide for SMEs

This guide aims to help businesses buy the right level of cover to protect them. Covering valuations, how risks change such as cyber and data protection, and basing sums insured for buildings on rebuild costs. Click here to receive a copy of the guide.

 

Did you know that at Pi-Property Insurance we can assist you with avoiding underinsurance for your properties?

As of April 2018, we have access to a discounted online desktop-valuation service, which is accessible to our clients via the Pi-Property Online System. If you would like to find out more information about this service and/or gain access to our exclusive discount code please contact us. 

01789 761 660

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