Spotlight: Buildings underinsurance – what can be done?

While tackling underinsurance can lead to greater levels of trust between an insurer and the policyholder, failure to take action can have significant downsides including reputational damage and even legal action, writes Tim Evershed

The UK’s underinsurance problem may slowly be trending in the right direction, but the industry still needs to do more to ensure that more properties actually get their insurance sums insured right.

That is one of the key messages coming across from the insurance market as it grapples with elevated inflation.

The goal of seeing all properties insured to within 5% of their correct value appears a distant one when looking at research from property valuation experts RebuildCostASSESSMENT.com.

The research shows those underinsured are on average still only covered for 63% of what they should be.

Brokers must continue to highlight underinsurance to policyholders on an ongoing basis and not just at renewal.

Paul Salisbury, Tysers Retail

The industry is making headway, but it is imperative that insurers, brokers and loss adjusters all look at what more can be done to tackle the problem.

There are multiple risks for those industry players who fail to address the underinsurance issue while those who get it right will enjoy opportunities to outpace their competition.

The industry can take steps to increase the number of accurate sums insured.

Paul Salisbury, client director at broker Tysers Retail, says: “Regular reviews are essential, and the policyholder must be made fully aware of underinsurance, average and the consequences. Brokers must continue to highlight underinsurance to policyholders on an ongoing basis and not just at renewal.

“Include index-linking and ensure the rate is continually updated – this will not solve the problem in isolation but can be part of the solution.

“Some brokers and insurers have links with valuers and can offer discounts for professional valuations and this is one way to encourage policyholders to follow up on valuations.”

Regular valuations

Regular valuations should be carried out by a professional valuer at least every three years and brokers and insurers can assist by providing the relevant contacts to RICS valuers.

The introduction of desktop valuations can help for smaller properties to speed up the process and also to control costs.

Education is vital and many insurers and brokers run webinars for policyholders which highlight underinsurance, and these are important and can be helpful.

Similarly, many brokers run email or social campaigns highlighting underinsurance and these, while not a complete solution, are helpful in raising awareness among policyholders.

Everybody quite likes brokers offering valuations as part of their service and their overall proposition.

Douglas Brown, Renovation Underwriting

Others believe that the industry should be using the stick as well as the carrot.

Douglas Brown, managing director at Renovation Underwriting, says: “You could make underinsurance more punitive than it already is, because when people are heavily penalised, they tend to go to some lengths to do the right thing.

“The broking community has a massive part to play in encouraging people to insure properly and helping them access services that are reasonably priced to enable them to do that.

“We’ve got ourselves into a position over successive decades whereby we don’t look at a service industry in the same way as we used to. It is effectively a service proposition. So, everybody quite likes brokers offering valuations as part of their service and their overall proposition.”

Underinsurance tools 

As evidenced by the improving numbers, the industry is already making some progress in tackling underinsurance.

Access to the internet, digital tools and data is helping all parties to gather up-to-date, accurate information that can help the process.

John Read, managing director of WTW Networks, says: “You would be surprised at how much information on your client can be gleaned from just their name.

“By working in partnership with your broker, and by being clear on your needs and requirements, a strong partnership or network can ensure that the clients are getting the best access to capital as well as putting in place practical steps to mitigate potential loss.”

There are tools available now to both the broker and to policyholders. These include online facilities that are available to help with buildings valuations in a cost-effective manner. There are also companies that can cover machinery and contents valuations.

Paul Lawrence, managing director at loss adjusters Thompson & Bryan, says, “There are tools that help with business interruption (BI), which is a key component of any insurance claim.

The introduction and development of AI technology could help with desktop valuations being more easily available and affordable to policyholders

Paul Salisbury, Tysers Retail

“They can support you in calculating the gross profit that’s been lost during the period you weren’t trading. That is there to place you back into a position financially you would have been in had the claim not occurred.

“There are calculators available for BI. They will take you through the process of ensuring your cover is correct and that everything is included that should be included to calculate gross profit.

“There isn’t an excuse anymore in terms of getting cover wrong. The help is there to make sure businesses get it right.”

The use of calculators is just one of the tools available to brokers. The web remains a treasure trove of information, where the details of many aspects of a risk can be found and are available to all while new technologies are becoming available for the industry’s use, notably AI.

Salisbury says: “The introduction and development of AI technology could help with desktop valuations being more easily available and affordable to policyholders and also be suitable for some larger risks as the technology improves.

“Developments in technology are constantly moving forward and Covid certainly speeded up digital technology. Undoubtedly there will be new solutions to assist with valuations in the future.”

Rewards

There are a host of rewards for those in the insurance industry who can make strides in solving the underinsurance issue.

Brokers who can demonstrate an understanding of their clients’ businesses and are able to use relationships with the insurance markets will improve their reputation over time and get more recommendations from their clients.

For underwriters, the biggest opportunity would be to issue average-free policies, says Brown.

He adds: “That means the sum insured is accurate, and the underinsurance is taken out of the policy and that reduces an element of uncertainty for the policyholder.

“It is also an opportunity to increase the levels of trust between the insurer and policyholder and a chance to take on the competition by increasing loyalty. The commoditisation of insurance is one of the worst things that ever happened because in complex areas like homes and businesses getting that bit right and getting an insurer and broker that have high trust characteristics is a really good way of insulating yourself from price pressure in the market.”

Legal action

Just as there are opportunities for those who get this right, there are risks for those who fail to take action.

There is a real possibility of legal action and errors and omissions [E&O] claims against brokers and insurers if policyholders deem the advice they are given was inadequate.

The knock-on effect of such claims can be severe reputational damage for the firm involved.

In addition, costs associated with such claims can have a financial impact and lead to potential premium increases for the E&O insurance of the broker.

Financially, those who keep clients’ premiums down by undervaluing risks will see less income or commission while business predicated on price is likely to move to the cheapest deal at renewal.

The reputational risk is significant, especially in the online world where criticism can go viral, severely damaging hard-won reputations almost instantly and giving competitors a vital edge in winning business.

“Reputational damage is the biggest risk,” Brown says. “So having those honest conversations with people and not being afraid to confront it and say to clients and potential clients if you don’t address this then we’re being set up to fail.”

Sponsored