The rising risk of underinsurance under inflationary trends


Inflation is hitting the UK at large, with the energy crisis, global supply chain disruptions and a labour shortage affecting all sectors of industry.

Inflation is well understood in terms of increased manufacturing and overhead costs and impact on reduced consumer demand, all affecting the profitability of businesses.
A not-so-well understood risk, albeit highly compromising the financial viability of organisations, is the impact of inflation on insurance and the subsequent risk of underinsurance caused by declaring insured values which are too low.

Underinsurance corresponds to insufficient insurance coverage that leaves the policyholder responsible for a large percentage of any loss and may lead to financial hardship.

Companies less able to pass on price increases to consumers, will be increasingly dependent upon the reliability of their insurance policies to recover from their losses in the event of a major insurance claim.
In this context, providing an accurate valuation of your business’ assets and recovery costs is an essential part of your insurance programme to limit the risk of major insurance claims being denied or disputed.
The cost of getting it wrong can be irremediable for businesses already stretched by hard economic conditions, increased operating costs, and loss of profitability.

Evaluating your assets


The construction materials shortage had already caused significant supply chain disruptions; the price of oil, natural gas and coal have all risen sharply since the start of the conflict in Ukraine, causing wider impact across the economy.

The BEIS Monthly Statistics of Building Materials and Components report for April warned that annual material price inflation increased to over 24% in March for several materials.

This sudden surge in energy costs particularly, will have further repercussions on energy-intensive materials; combined to rising costs of labour, and growing demand, it will intensify the inflationary pressure on building materials, architectural and planning costs.
Supply chains disruptions also mean longer delays in sourcing materials, significantly extending rebuild times already stressed by the growing shortage of labour.

CLC reported earlier this year that inflation concerns are leading some suppliers to only hold quotes for tender prices for 24 hours. The resulting uncertainty has reportedly led some contractors to pause before entering fixed-price or long-term contracts.

In this context, it is important to consider these inflated costs to accurately evaluate property and business assets based on the rebuilding value. This should be done in the context of extended rebuild times and rising costs of material, labour, reinstatement and planning, alongside the cost of replacement of key items of machinery and plant, coming on top of recent component and chip shortages drastically slowing technology-linked supply chains.

Business Interruption indemnity period


It is important at this time to reassess not just replacement values but also your continuity plans and Business Interruption indemnity period. This is particularly critical if your current period is only 12 months, as supply chain limitations can make it harder to reinstate from a major loss.

Any delays in the rebuilding process will, therefore, have a significant knock on effect to the length of time it will take for the business to recover and potentially leave a very significant portion of costs uncovered if the indemnity period is insufficient.
Underinsurance has long been a key problem for the insurance sector; the situation is now compounded with the on-going external challenges.

What steps should you take?


  1. Check your policies for relevant ‘Average’ or similar clauses which set out a mechanism to reduce pay-outs in the event of any under-declaration of values, even if the loss suffered is low in value.
  2. Correspondingly, check whether your current policies include any wider protective clauses to provide leeway in the event of relatively minor un der-declaration or to allow for inflationary uplifts during the course of the policy.
  3. Have you had a professional valuation of the buildings and machinery and plant in the last 5 years?
    If not, how have you undertaken valuations for insurance purposes and have your insurers agreed this methodology?

How can we help ?


Mactavish is an independent expert insurance buyer and specialist in claims resolution,  we can help you to manage your way through what will continue to be a challenging period in insurance. Why not take advantage of our expertise and position in the market to check and reinforce the reliance of your insurance covers?