While inflation in the UK is on a gradual decline and is expected to fall to a low of 2.0% in 2024, according to recent estimations published by the Bank of England¹, currently, the prospect of prices fully reversing to pre-pandemic levels remains pretty slim. Instead, price increases are estimated to stagnate, meaning we likely won’t see a difference in our cost of living for some time².
What this means for insurance is that the situation remains largely unchanged versus a couple of years ago. The cost of rebuilding properties remains at an all-time high when factoring in building materials, demolition, labour and legal costs. According to Aviva, over half of all UK businesses could be underinsured. 40% of policies with buildings have at least one premises suspected to be underinsured by 20%³.
The picture for small to medium enterprises (SMEs) is more staggering. Of the 4.3 million SMEs currently in operation in the UK, 80% are currently estimated to be underinsured⁴.
What is underinsurance?
If your insurance does not sufficiently meet your business requirements in the event of a claim, then you are underinsured. This can be due to setting cover limits too low or insuring assets for insufficient amounts. Underinsurance can have serious consequences for SMEs, including financial hardship, difficulty recovering from losses, and even business failure.
In the event of a claim, should the insurers find you to be underinsured, an average is applied. This is a principle used by insurers to calculate the amount of a claim payment when the insured property is underinsured at the time of a loss. This principle helps ensure that policyholders maintain adequate insurance coverage for their assets.
When a property is underinsured, meaning the value declared in the insurance policy is lower than the actual value of the property at the time of the loss, the insurer may apply the principle of average. For example, if your property is valued at £1,000,000, but is only insured for £500,000, then the amount payable will be reduced by 50% because the building is underinsured by 50%.
This would mean that even if you claim for £10,000, despite being insured for £500,000 of your property, you are still 50% underinsured. The insurer will only pay 50% on the £10,000, leaving you with a maximum of £5,000.
Put simply, if you suffer from any type of property or business loss that results in a claim, you might find that it could fall short of what today’s actual cost is to replace or rebuild. How would your business cope if you suffered a major loss, but were underinsured?
How can you avoid being underinsured?
Commercial property
Rebuild costs for properties have risen sharply over the last few years⁵. It is worth remembering that a building’s market value is not equal to rebuild cost, and it is advisable to obtain a rebuild value on your property every three to five years. However, as we are currently seeing the highest level of inflation in some 40 years along with supply chain issues, there has never been a more important time to review your cover to ensure it remains sufficient.
It is also important to consider listed buildings, landmark buildings, and those otherwise ‘outside the norm’ as these would need the attention of specialist construction workers, and therefore need to be assessed on-site by experienced valuers, contributing to increased costs.
Contents, stock, plant, and machinery
The value of your business assets will change constantly, and it’s important to stay up-to-date, especially during times of peak stock levels so that you are aware of your maximum contents value. Creating an asset register and regularly checking replacement costs will help to ensure they are accurate.
Business interruption
Material and labour shortages, supply chain hold-ups, factory closures, and restrictions at ports all mean that in today’s conditions, it could take longer than usual to return to the position that your business was in before the loss occurred⁶. You may need to reconsider what any interruption could mean for your business and how long you could be affected – this could mean extending the indemnity period of your policy.
You will also need to consider your reported turnover, too. If this isn’t reported correctly, this may impact any claim.
How NFP can support you
We’ll conduct a no-obligation review of your insurance, to thoroughly assess your business’s specific needs and potential risks. Our team will help uncover your underinsurance risks and build a robust protection strategy to keep your business covered.
Concerned about how underinsurance could threaten your business? Our commercial insurance team is on hand to help. Read more in our commercial buildings insurance section.