Blog: Perfect storm of factors expected to leave large portfolios underinsured

A series of simultaneous events that began with Brexit, closely followed by the Covid-19 pandemic and, more recently, a hike in fuel costs have culminated in a shortage of labour and materials as well as delays to delivery. The net result is price hikes across all construction works.

In the current climate, from the perspective of the building and construction industry, establishing costs in the first place can be difficult. Some contractors are so busy they will not attend the site to quote for the work required, meanwhile materials pricing on tenders is often qualified as being fixed for only a set period and uplifts may be pursued later. A shortage of supplies is problematic too, with some contractors who have become stretched as a result of recent events having to hoard necessary building materials in order to maintain their schedules.

The unpredictable size of potential claims understandably makes it difficult – if not impossible – for insurers to allocate an accurate claims reserve. The most recent Building Cost Information Service quarterly report forecasts the All-In Tender Price cost increases at 3% to 4% per annum over the next five-year period. We expect that, in reality, this could be closer to 20% in this year alone. Without adjusting limits and revising property reinstatement figures in line with current construction inflation, the impact potentially leads to a case of underinsurance.

Regardless of the size of the property, when taking out an insurance policy and bearing in mind building damages in the event of complete destruction, it should incorporate the true costs for the whole site and its building definitions. Not doing this in the first instance could lead to unwelcome problems when wanting to settle a claim. If these costs are not accounted for, it could result in a huge loss being unrecoverable, ultimately putting strain on the policyholder during hard financial times.

The implications for policyholders are significant, particularly those with large property portfolios. We have noted that many policies drafted before recent developments have not been reassessed, and current value at risk assessments are tricky given the contextual factors outlined and the unquantifiable costs attached to them.  

While many expect these issues to remedy themselves in the short to medium term, with the hope that they will return to pre-Brexit normality within 12 to 18 months, the current challenges are very much live and are leaving large portfolios exposed. A VAR assessment for portfolios is therefore critical to ensure the correct level of cover in this climate. These assessments are comprehensive in their consideration of contextual factors, as well as the specific details of the building or buildings that comprise the portfolio.

Carrying out a VAR assessment can be complex and technically challenging, but is vital to ensuring a property is fully and correctly insured. The assessments being undertaken on a building by building basis allow for broker analysis of the values at risk and estimated maximum losses, which should assist in their insurer negotiations.

With current trends expected to continue for a while yet, it is crucial to provide the best, valuable advice from combined experts and put a programme in place that provides the right level of protection in the event of damaging property loss. For those with significant exposure, an up to date and accurate assessment will provide much needed peace of mind while we weather this volatile time.