Inflation-driven underinsurance demands new approach

With the Bank of England predicting that inflation in the UK could reach 10% in the coming months, there are growing fears amid the insurance industry that this incline will lead to an underinsurance crisis which will leave millions of businesses and individuals with insurance coverages that do not match the value of the assets they are designed to protect.

Research from the Chartered Institute of Loss Adjusters and Biba, published in 2018, estimated that underinsurance was present in around 40% of all claims that year - the degree of underinsurance was approximately 35% to 45%.

The rising costs of raw materials have been exacerbated by a number of factors hitting global supply chains – including Brexit, the Covid-19 pandemic and the conflict in Ukraine.

These events have not only pushed up the price of materials, but have also caused huge backlogs in the ability of supply chains to deliver to the UK from around the world.

Have you got enough BI?

In turn, this has created new risks for policyholders around the length of indemnity they require for the restoration of their property, or the resumption of their operations in the event of a business interruption (BI) claim.

Peter Blanc, group chief executive of Aston Lark and president of the Chartered Insurance Institute, said that inflation-driven underinsurance is now a dominant challenge.

“While inflation has [already recently] risen, it is likely [that] it will continue to rise in the months ahead. If you are a business, your turnover may have risen in the past 12 months and your costs have also increased dramatically.”

Blanc added that supply chain issues and the rising costs of materials have had knock-on effects that need to be considered.

He continued: “Take a small factory, for example, which has suffered considerable damage. How long will it take to replace the machinery lost?

“Given the pressure the supply chain is under, replacing machinery within 12 months is no longer possible. Companies are facing a wait of 18 months or more for replacements. They may have a business interruption indemnity of 12 months. It is not long enough given the current stress on claims and restoration.

“We are now recommending to our clients that they need at least a two-year BI indemnity period.”

The ‘antidote’ to underinsurance

The broader insurance market has been quick to review how underinsurance can be tackled in today’s economic climate.

Alastair Blundell, head of general insurance at Biba, told Insurance Times that brokers have a key role to play as the “antidote” to underinsurance because they can guide clients through the insurance buying process to ensure that all values and cover levels are correct.

This is especially pertinent following Covid-driven business operation changes and amid rising prices for both utilities and materials.

He explained: “Prior to the pandemic, we estimated that around 20% of claims had a degree of underinsurance. That figure has risen considerably and, unfortunately, it is likely to get worse before it gets better.”

“Inflation is playing a part on the costs of rebuilding and reinstation. We are also seeing clients increasing the gaps between the revaluation of their assets at a time when supply chain issues are increasing costs.

“Biba has been worried for some time around the impact of [the] supply chain in the supply of materials. As such, our view is that indemnity periods need to be raised from 12 to 24 months, to ensure that there is adequate time for any work to be completed.

“Brokers need to work with clients to ensure they have the right values [insured] and – [bearing in mind] the way Covid has forced firms to change how they operate – [that] there are no gaps in cover.

“Many firms have moved to [an] online operation, but do they have the necessary cyber cover?”