In its latest ‘Broker Barometer’ survey, Aviva found that around three out of four (73%) brokers worry that their clients are underinsured, with only 24% reporting that their clients have adequately increased their insurance sums in response to inflationary pressures.
With headline inflation starting to level off, the worry for the market is that the spotlight on underinsurance will start to dim despite it remaining a deep-rooted and significant risk, which brokers have expressed considerable concern about for many years now. Keeping conversations about underinsurance alive requires insurers, brokers and insureds alike to understand the full extent of the insurance protection gap as it exists today – and that starts with getting to grips with the underlying factors at play.
One such nuance is on the subject of inflation, according to Andrew Slevin (pictured), director at Charterfields, who highlighted the difference between headline or ‘consumer’ inflation, and inflation as it pertains to construction inflation or equipment inflation specifically. “There is some sign that we’re starting to see complacency set in, when clearly the issue has not gone away…
“For example, at its peak, the CPI (Consumer Prices Index) recorded inflation at 11.1% but, in that month, year-on-year, the cost of equipment went up by 20%, which is largely down to chip shortages caused by increased demand and disruption during COVID. Then in construction, inflation is still sitting at between 5-to-7% and that’s driven by continuing material shortages, the impact of Brexit on imports, and labour shortages in construction.”
Each of the factors behind the sharp increases in inflation seen across equipment and construction is still present today, albeit to varying degrees. It is by comparing existing declared values and assessed values that the protection gap can be measured but, all too often, the declared values haven’t been updated in a long time. This speaks both to the lack of education about underinsurance in the market, and the risk it presents to the policyholder – and their broker as their trusted advisor.
Charterfields’ Underinsurance Report 2024 found that over 55% of all buildings and civil works surveyed were under-insured, with 37% of locations surveyed under-insured by over 50%. Meanwhile, looking at the declared values for plant, equipment and contents, it was revealed that over 78.5% of all locations surveyed were under-insured, 41% by more than 50%.
It is understandable that with so many different challenges, both static and emerging, facing businesses today, underinsurance might get pushed down the risk register but the fact remains that it has significant implications for a business’s ability to bounce back from any balance-sheet shocks or interruptions. “I was speaking with a broker the other day who was saying that surely most people have already revalued their portfolio at this point,” Slevin said. “But the reality is they haven’t – or they did a valuation of one or two properties as a sample exercise but haven’t implemented the lessons of that exercise across the rest of their portfolio.”
An interesting shift happened in the market three or four years ago when underinsurance started to be widely warned against, and it saw insurers start to reintroduce the average clause they had previously reduced or dropped off policies. The concern for Slevin, and his team at Charterfields, however, is that there is a perception among some insurers that, having introduced that clause, they’ve shifted that risk from themselves to the policyholders. “But clearly, it’s going to take time for that to filter back [to insureds] because it could be years before they have a loss and then realise they have a problem.”
Another misapprehension that often goes under the radar about underinsurance is the perception that having an updated and accurate valuation of your risk will have a linear impact on your premium. It’s not as simple as that and, in some cases, having that conversation with the underwriter won’t increase the premium at all because the rates were set based on the insurer’s understanding that the risk was being undervalued. Having the evaluation done shows that the client is on top of their risk management and, as such, a healthier overall risk.
Greater transparency in how risk is evaluated and priced would make for a healthier overall market, Slevin said, and he would encourage insurers and brokers alike to engage in conversations about rate and to clarify the factors they take into account when pricing for risk. Fostering better collaboration will become increasingly crucial as insurers increasingly look to build their own internal tools as part of the underwriting process to help them identify underinsurance. “And they’re now being quite forceful in feeding that information back to the brokers and saying, “This doesn’t look correct”.
“In the past that depended on the experience of the individual underwriter, now it’s driven by data science. That’s really helping the underwriters push back to the broker to figure out what the actual insured values are. And if it’s implemented correctly, and it uses the right information to deliver the right results, that’s good for them, for the brokers, for the insured, for us and for the wider market.”
