In December, the Financial Conduct Authority (FCA) issued a stark warning to insurance firms, cautioning them not to undervalue insured assets when settling insurance claims, particularly given the cost-of-living crisis. The FCA’s assertion that it has seen evidence of some consumers being offered a price lower than their vehicle’s market value by their insurance providers was heard loud and clear across personal lines.
But what’s the message for commercial lines? Is it time for insurance businesses handling commercial insurance offerings to proactively engage in discussions around underinsurance and its perils? For Alun Jones, chief commercial officer at Addresscloud, given the inflationary pressures in the current marketplace, the time is absolutely right for the market to be engaging in these discussions - though he’d argue they should have started already.
“We’re seeing an increase in rebuild costs of around 14%, with individual material costs, such as steel and concrete exceeding this,” Jones said. “Any valuation obtained over six months ago is likely to be outdated due to the rapid pace of inflation so it’s vital that these discussions are had between brokers and policyholders, and brokers and insurers.”
Adding his take on the situation, Aaron Woodhams, head of underwriting at iprism, noted that “involvement not intervention” from the FCA should be the way forward in commercial lines. In this sector, he said, policyholders should have a much better idea of the value of what they’re buying, and brokers must be heavily engaged to ensure they have accurate sums insured and reinstatement values.
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“With inflation, the war in Ukraine, fluctuating exchange rates and labour and materials costs, we’re experiencing a perfect storm for significant underinsurance,” Woodhams said. “Inflation has increased at lightning speed even within policy periods, so the onus is on brokers to consider mid-term evaluations and assessments on the risk to ensure they reflect the correct value.
“Now is the time to have those discussions. Insurers can only price as accurately as the data they receive, so we rely on our broker partners to have an in-depth understanding of their clients’ risks, and business continuity plans. For the first time in decades, we are noticing the tangible impact of inflation in our pockets. Prices are rising all around us, to ignore this and try to place commercial business based on old sums insured values is at best naïve and at worst, poor practice.”
Director at Charterfields, Andrew Slevin highlighted that while the consumer policies behind the FCA’s warning are different to commercial property damage policies, there is a clear message from the FCA to insurers that they need to be perceived to be fair to policyholders in claim situations.
“Commercial lines policyholders have struggled over the last few years to keep up to date with all the changes to risk management,” he said, “be that increased documentation, the impact of COVID, supply chain changes or high inflation, and not all firms have a large risk management/insurance team to be able to keep abreast of these events. So, it will be interesting to see whether the FCA expand their comments on fairness to include claims under commercial policies.”
Woodham noted that underinsurance is a massive concern in the commercial lines market. UK inflation is at a 40-year high, he said, while the prices of energy and materials are accelerating and there are labour and materials shortages globally. This has to be taken seriously, and in many cases, firms may have to change the way they do business to make sure they’re not putting clients at risk of underinsurance.
“Brokers have a critical role to play in educating their clients on the risk,” he said, “pushing for more regular, accurate valuations from independent experts and ensuring business continuity plans take into account all eventualities, for instance seasonality of stock. Often overlooked is the rising cost of business interruption; indemnity periods may not be enough to cover the extended delays in reinstatement as a result of these materials shortages. In some cases 36, even 48-month indemnity periods would be more appropriate.”
Charterfields’ Slevin noted that the firm has seen an “unprecedented” increase in enquiries for insurance valuations over the last 12 months. What is interesting is that these enquiries are coming from insurers, brokers, risk advisers and policyholders, he said, demonstrating the wide concern across the insurance market that declared values are out of sync with the actual values at risk.
“While some firms are reviewing declared values by using indices, there is still confusion on how costs are changing – the headline CPI inflation figures may have little correlation with how construction and equipment costs may have been changing”, Slevin said. “For example, while CPI is up 11.1% to the 12 months to October 2022, construction costs are actually up 15.5% over the same period and cost changes are varying materially depending on the type of construction and location. One equipment supplier we spoke to earlier in 2022 was saying they were putting up the cost of their products by 25% this year.”
Jones added that this peril is a huge concern for Addresscloud’s clients who could potentially be facing significant underinsurance on their books, which will in turn impact the adequacy of their reinsurance arrangements. For policyholders themselves, he said, the costs extend beyond the financial, facing underinsurance at the point of claim could be the difference between success or failure.
“Underinsurance undoubtedly needs to be tackled, but it’s a tricky issue,” Jones said, “particularly when it comes to pricing. In the current hard market, insurers want to keep premiums competitive, but by conducting detailed assessments of the sums insured, it’s inevitable that premiums must increase to cover the costs of underinsurance, which, according to recent figures, is extensive.
“Brokers and insurers must work together to ensure the right information is provided and the right price generated at point of quote to correctly price the risk and avoid awkward conversations further down the line when a claim occurs.”
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