Underinsurance - a continuing issue
Authored by AIG
“There’s been no end of uncertainty for businesses over the past few years and although inflation has started to slow, businesses are still experiencing supply chain issues, labour shortages and an unpredictable costs environment. Given this, indemnity periods still need very careful consideration and any business that has under 12 months needs to seriously consider if this is enough, especially if the insurance and the values has been carried from the prior year largely unchanged.” - Nick Hobbs, Chief Distribution Officer
All businesses are open to risk if they don’t have the correct level of insurance, and some, more than others, may be at risk of financial hardship as a result of being either underinsured or uninsured.
Although the UK is not currently in recession, continued economic uncertainty and low productivity means growth is expected to slow and we’re seeing evidence of businesses dropping aspects of cover.
Although not all insurance is a legal requirement, businesses need to ensure that they’re adequately covered against many of the risks they could be exposed too, so they aren’t left in a vulnerable position.
Here are some of the ways a business might be underinsured
Incorrect sums insured
When something goes wrong, businesses are covered for their ‘sums insured’, which is how much it would cost to reinstate the business in the event of a loss, up to a certain amount. If this isn’t calculated correctly, business could find themselves underinsured. An up-to-date inventory of all a business’s contents can help set the right sum insured. This needs to take into consideration everything in the premises. It should also reflect peak stock levels, rather than the average.
Unrealistic indemnity periods
Although post-pandemic imbalances have started to normalize, there are still trade embargos, labour shortages and a rise in regulation, which continue to present risks to supply chains*. This could lead to businesses being underinsured without even realising. Many businesses underestimate how long it will take to fully recover their trading level after a loss, with many opting for a 12-month indemnity period rather than a more generous – and more realistic – 24-month one. This can be the case particularly where a business is in an historic or unusual building that may take longer to rebuild or it has specialist equipment that can take time to replace.
*Allianz Economic Outlook - Economic outlook & inflation (allianz.co.uk)
A change in business
Business needs may have changed. For example, revenue might increase; the terms of reference might change; or the business could switch from being privately to publicly owned. If changes like these occur, the business’s financial lines insurance, which covers financial loss and the costs involved with this, will need to be reviewed and updated. Businesses need to check their cover remains in line with their activities.
It’s important the sum insured for buildings represents the full rebuilding cost of the property. Customers shouldn’t use market value or valuations for mortgage purpose when setting their insurance Declared Value. More information can be found in our Guidance notes for sums insured.
Without the correct level of business insurance, a business will have to pay for any compensation claims itself to cover the cost of replacement, such as tools and equipment, stock, repair of premises etc. These unforeseen costs could be catastrophic, especially for smaller business.
It’s also the case that some trading authorities and other organisations might require a company to have a certain level of insurance for a particular area in order to work with them, and so not having insurance in place could mean that the company fails to secure new business opportunities.
Regardless of the type of business, all businesses should review their insurance annually, or at any time there is a significant change to their business, including their financial lines cover, to ensure they’re not at risk.
Brokers play a key role in not only helping their customers understand what their sums insured and indemnity periods should be, but also in explaining the wider benefits insurance can offer, beyond just financial protection. This might include expert advice or securing alternative premises, depending on the policy. Ensuring there is a regular conversation between businesses, brokers and insurers, will help identify any changes in cover requirements.
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