Risk of Underinsurance

Published On : 14 Mar 2025

Inflation may be at its lowest level for three years, but the challenges around underinsurance haven’t gone away.

Whilst Brexit and the impact of COVID-19 to the world economy may now be old news, we continue to see the effects of inflationary pressure on customers’ sums insured on a daily basis. In our personal lives, we have all probably been affected by increased insurance premiums impacting our cars and our home.

A combination of factors since 2021 has seen inflation hit levels many of us have never witnessed before.

The rising inflation over the past three years can be attributed to several key factors:


- Supply chain disruptions: The COVID-19 pandemic caused significant disruptions in global supply chains, leading to shortages of goods and materials. This imbalance between supply and demand has driven up prices.
Increased demand: As economies began to recover from the pandemic, there was a surge in consumer demand, particularly for goods. This increased demand, coupled with supply chain issues, has contributed to higher prices.

- Labour market constraints: Labour shortages in various industries has led to increased wages, as companies compete for workers. These higher labour costs are often passed on to consumers in the form of higher prices.

- Geopolitical tensions: Events such as the Russia-Ukraine conflict and the red sea shipping crisis, have disrupted global markets, particularly in energy, raw materials and food supplies, leading to price increases in these essential commodities.

- Energy prices: Fluctuations in energy prices, particularly oil and gas, have had a significant impact on inflation. Rising energy costs increase the cost of production and transportation, which in turn raises the prices of goods and services.

How inflation impacts your insurance policy

Inflation can have several significant impacts on the insurance industry, affecting both insurers and policyholders. Here are some key points to consider:

- Claims costs: Inflation can lead to higher costs for goods and services, which in turn increases the cost of claims. For example, when the cost of building materials and the cost of replacement car parts rise, the amount insurers need to pay for property damage claims will also increase.

- Premium adjustments: To keep pace with rising claims costs, insurers may need to adjust premiums. This can result in higher insurance premiums for policyholders, as insurers seek to cover the increased costs of claims.

What is Underinsurance?

Underinsurance occurs when your clients' cover isn’t enough to cover the full cost of their losses or damages. This means that if a claim needs to be made, the payout from their policy may not be enough to cover the actual value of the loss. This situation can have severe financial consequences, leaving your clients to cover a sizable part of the costs themselves, as well as a poor claims journey.

There are many reasons why underinsurance happens. Valuations are often out of date, roughly calculated, incorrectly calculated, or a valuation has never actually been carried out. Recent research in the UK has found that a whopping 76% of UK properties are underinsured.

If your clients haven’t had a valuation in the last 5 years, the likelihood is, they’re underinsured!

What Happens When Your Clients’ Property is Underinsured?

If your clients' property is underinsured, they may face consequences such as:

- Reduced payouts: In the event of a claim, insurers will typically apply the ‘average’ clause meaning, if your clients’ property is insured for less than its actual value, the payout will only be a proportionate amount of the claim.
- Financial hardship: Any underinsurance, and application of average, means that the shortfall will have to be financed by the policyholder.
- Legal and compliance issues: Underinsurance can lead to legal issues, especially if your clients are required to uphold a certain level of insurance coverage.
- Emotional distress: not only does underinsurance lead to financial strain, it can also lead to emotional stress for the policyholder.

How to Avoid Your Clients Being Underinsured

There are a few things you and your clients can do to ensure underinsurance doesn’t affect them. Here are our key takeaways:

- Insure to the cost of rebuilding or replacing: The cost to rebuild a property is the value it should be insured for, not the market value. This usually includes the full cost of rebuilding, including debris removal, professional fees, design, labour and materials etc. It is important that the insured considers the cost to replace items at today's prices. This is especially true when it comes to items such as watches and jewellery, as well as industrial machinery and contractor’s plant.

- Regularly review of sums insured: We recommend that policyholders obtain a professional property valuation every three years. We want to collaborate with brokers to highlight the issue of un-insurance and encourage their clients to get expert advice on not just buildings, but contents, machinery, valuables and business interruption sums insured. Index linking can help to maintain appropriate sums insureds, but only if they are based on accurate initial valuations.

-Future growth: It is important that business customers consider sums insured to reflect any growth or changes in their business operations, such as new acquisitions, expansions, or increased stock levels.
Inventory list: We recommend that policyholders maintain an up-to-date inventory list of assets, including detailed descriptions, purchase dates, current value and the cost to replace as new.

Support from Pen Underwriting

Pen is committed to both helping and supporting brokers and policyholders in identifying potential underinsurance, as well as suggesting and promoting ways to avoid this growing issue. We provide ongoing training and education for our underwriters, to better equip them with the skills to identify indicators of potential underinsurance. One key indicator might be a renewal where the sums insured have remained unchanged for a number of years or where turnover has increased but gross profit have remained unaltered. By raising with our broker partners, we can help to identify a potential issue that we all want to avoid.

There is no magic solution to underinsurance. So, whilst we can identify potential issues, the only true solution is to ensure property sums insured are adequate through a professional valuation. Here are two options:

- Desktop valuations

- Rebuild cost assessments are completed remotely by a professional assessor, using publicly available information and existing data

These desktop valuations are suitable for smaller properties and less complex construction.
The assessment will inform the cost of rebuilding the property from scratch, including the cost of removing debris, including fees.

Onsite valuations

Where the property is larger and more complex, we would always recommend that a professional surveyor visits the premises. A surveyor will spend time at the policyholder’s premises and may take several days to complete their assessment, depending on the complexity of the property.

We have partnered with QuestGates Ltd, chartered loss adjusters and claims specialists, to offer onsite buildings, machinery and business interruption valuations and reviews for our policyholders.*

Where we are in receipt of a professional buildings valuation and the sum insured has been adjusted accordingly, we may be able to offer average free policy cover. Underinsurance is a growing concern and being underinsured could lead to financial difficulty for policyholders. We all have a duty to ensure underinsurance doesn’t happen to our clients, and that we deliver good customer outcomes. When a claim does happen, we all want to see a good outcome for the customer, with a quick and efficient claims resolution. Helping your clients avoid this risk of underinsurance is easy. The goal of insurance is to provide peace of mind, not financial strain.

*Please note, these services are not funded by Pen Underwriting.



The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Pen Underwriting accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.



References:

https://www.financial-ombudsman.org.uk/data-insight/insight/insight-in-depth-underinsurance-misrepresentation-non-disclosure#:~:text=Average%20clauses&text=For%20example%2C%20if%20a%20consumer,consumer%20would%20get%20%C2%A34%2C900.

https://www.postonline.co.uk/personal/7956026/property-insurance-payouts-hit-record-quarterly-high

https://www.abi.org.uk/news/news-articles/2024/8/property-insurance-payouts-hit-record-quarterly-high/

https://www.ajg.com/uk/news-and-insights/2024/august/tackling-underinsurance-in-sports-and-recreation-centres/

https://www.rebuildcostassessment.com/?gad_source=1&gclid=CjwKCAiAn9a9BhBtEiwAbKg6fsFWEEKCe5D1Tl5CYN3yf_2igpC6SnmdyTfSiqPPijsmWbJ1JBnbMBoCk9kQAvD_BwE