According to Crawford & Company and many industry stakeholders, Australia’s underinsurance gap is steadily widening. The issue is a well-established property insurance challenge but arguably less widely known as a concern for business interruption (BI) policies.
The result, in both cases, is insurers missing out on premiums and customers receiving reduced claims payouts.
Crawford, the global claims management provider, is drawing attention to underinsurance challenges, with a soon to be published white paper: “The (often severe) impacts of underinsurance – adequacy of sums insured/declared values in stock and business interruption.”
The firm is urging brokers to focus more attention on this issue to help eliminate this growing problem. Stephen Stafford (pictured above), the white paper’s author, said the impact of underinsurance when it comes to actually making a claim is commonly misunderstood.
“Many insureds consider a reduction in insurance premiums as an easy cost saving measure for their business,” said Brisbane-based Stafford, who is Crawford’s executive general adjuster and senior forensic accountant.
However, Stafford said, as protection from overpaying claims where an insured has not paid the appropriate premiums for cover, an insurer will often include an average or underinsurance clause in the policy.
“What these clauses effectively do is allow insurers to pay out the claim up to a certain percentage of the insured value, based on the fact that the insurer has missed out on considerable premiums that would have been paid if the property was insured at the correct level,” said Stafford.
These clauses, he said, are often used in property insurance and BI policies.
“Effectively, these clauses state that if the sum insured is significantly under declared, any claim made under the policy will be proportionately reduced in line with the under declaration,” said Stafford.
He said the implications for both the insurer and the insured are “significant.”
“For insurers, the amount of premium paid by the insured is understated, resulting in reduced income and reserves to manage payable claims,” said Stafford. “For the insured, in the event of a claim, there will be an under recovery of losses from the policy.”
He provided statistics to back this up based on a Crawford review of 39 stock and business interruption claims over the last 12 months.
“Where underinsurance was applied, we identified underinsurance adjustments of $10.76 million across 39 claims, with an average adjustment of 53.92%,” said Stafford.
This amounts to $275,000 of uninsured losses per customer. From an insurer’s perspective, said Stafford, this equates to nearly $7,000 in lost premiums from each customer.
He said this sample demonstrates the likelihood of “significant numbers” of underinsured customers.
“However, this issue may not be identified until a claim triggers the policy,” said Stafford.
On the positive side for brokers and some of their customers, Stafford said insurers do “offer plenty of allowances, even exceptions” to accommodate this underinsurance issue “when the real value has been unintentionally under-declared.”
He said many insurers include an 80% co-insurance adjustment in the policy terms.
“What this means is that it gives the policyholder a 20% buffer so that even if the policyholder’s assessment of declared values is understated by up to 20%, they will not be penalised in the event of a claim,” said Stafford.
However, for BI claims, he said getting the insured value correct can be very challenging.
“When we’re not talking about bricks and mortar, it’s far more complicated to land on the magic figure,” said Stafford. “If we consider insurance that covers business interruption, this is when brokers and policyholders need to be alive to agreed third parties who can assess values.”
He also said some insurers will even waive underinsurance clauses when the insured has used an agreed third party to calculate declared values.
“The rationale is that where the declared values have been calculated by a professional firm, more reliance can be placed on the accuracy of the values than if prepared by the insured or broker alone,” said Stafford.
He said professional firms are “a very useful tool for brokers” to protect their clients.
“At renewal time each year, it is absolutely critical for brokers and their clients to be closely looking at insured values and analysing the accuracy of those values based on the current market,” said Stafford.
The Crawford expert, who spent a decade working for global brokerage Marsh, is also presenting a National Insurance Brokers Association (NIBA) seminar for brokers on underinsurance challenges. The Brisbane in-person event is on Wednesday.
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