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Continuing to combat underinsurance

Posted: 28 September 2021
The last year has seen businesses facing tough economic conditions, with many having been forced into ‘survival mode’; it’s perhaps unsurprising that insurance needs may have been neglected. As the UK tentatively emerges from lockdown, and more than a year following Brexit, we consider how insurance requirements have been shaped by recent events, plus the role of the industry in continuing to educate customers about the risks of underinsurance in order to ensure that a policy can perform in the event of a claim
Businesses were still adjusting to the new rules and regulations arising from Brexit when they were thrown further into chaos by the Coronavirus pandemic in March 2020. Consequently, organisations had to find the best ways to navigate the new environment, from moving operations fully online to shifting their business models, (e.g. restaurants offering delivery services). However, in many cases, changing ways of working also mean changing insurance requirements, which highlighted a problem. According to BIBA’s 2021 manifesto, whilst two thirds of businesses adapted their business models during the pandemic, only 10% made any changes to their insurance cover.1 This means that the majority of businesses potentially would have found themselves to be underinsured, or even uninsured, in the event of a claim.

In 2020, Britain’s economy shrank by 9.9%, which was the largest annual fall in UK GDP on record.2 Between April 2020 and 2021, government borrowing reached record levels of £229bn3, driven by measures to protect the economy and assist businesses in keeping afloat during lockdown. Initiatives such as the Coronavirus Job Retention Scheme (known as the ‘furlough scheme’) offered some relief to businesses but nevertheless, an average of 48 shops, restaurants and other leisure facilities closed permanently across England, Wales and Scotland each day.4 

With companies facing cash-flow challenges or just fighting to stay open, having the right insurance in place became another casualty of the pandemic in many instances. Where companies did keep their insurance needs updated, uncertainty around the future of operations made it difficult to accurately assess the requirements and limits of cover. 

A similar issue with accurately assessing sums insured was seen in the lead-up to Brexit, when some companies stockpiled goods in response to uncertainty about potential impacts on supply chains. Additional stock needs to be accounted for when arranging insurance to ensure that it’s covered in the event of a claim. Further, the value of stock can change, which needs to be factored in when arranging cover. 

It’s also important to be aware of the impact that exchange rates can have on sums insured, for example when importing items to the UK. If an item is priced in a foreign currency but insured for a value in UK sterling, any fluctuation in the exchange rate will have a concurrent impact upon the sum insured.

Another potential pitfall for customers to be aware of is the changing situation with liability insurance. The change in the Ogden personal injury (PI) discount rate in 2019 resulted in higher awards for liability claims. Therefore a customer insured for a certain amount could find themselves underinsured in the case that they are sued. Brokers have therefore been advising customers to take higher limits on their insurance. 

It’s important for brokers and insurers to understand some of the reasons why the issue of underinsurance persists in order to tackle the issue.

Challenges with cash-flow have already been mentioned but there’s also the inescapable fact that insurance is an intangible asset and often viewed as a ‘grudge purchase’. However this is where the broker plays a significant role in explaining the benefits of obtaining the right valuation and the protection that insurance can offer. The temptation may be to select a policy based on price rather than suitability of cover. However, paying a few hundred pounds could potentially avoid the situation of being underinsured by several thousand. Allianz has produced Guidance Notes for Sums Insured for brokers, which provides information on factors to be considered in an insurance valuation, from buildings to contents and stock. 

Another reason could be a lack of familiarity or understanding; after all, insurance can be complicated. According to Graeme Trudgill, Executive Director at BIBA, “we probably as an industry need to explain ‘insurances’ better”5  without jargon and using language that customers can understand.  Again, the broker can play a key role here in explaining the wider benefits that insurance can offer, beyond just financial protection. This might include expert advice, help with sourcing equipment or securing alternative premises, depending on the policy.
Finally, a customer may have a negative view of insurance if they’ve previously had a disappointing claims experience. The insurance industry suffered some reputational damage during the pandemic, mainly due to the legal issues surrounding business interruption claims. This reiterates the importance of clear communication with the customer to ensure they have the right insurance in place at the point of sale in order to allow insurers to fulfil the contract.
The UK economy is starting to show signs of recovery but it’s still too soon to fully assess the long-term damage of Covid-19. At time of writing many of the government support schemes in place are starting to unwind and cease altogether, despite some calls to put in a permanent furlough scheme for any future crises. Further, many insurers who flexed their product and underwriting appetite during the pandemic are now re-evaluating and reshaping their solutions for the future. Businesses will continue to face challenging circumstances in the post-pandemic rebound, with some sectors more affected than others. It remains crucial for businesses to keep up to date with their insurance requirements along with evolving needs.  
covid shop sign
There are a number of ways that the insurance industry can assist in tackling the underinsurance issue. At the core of the broker offering is advice, which relies on seeking as much information about the client as possible. It can be difficult to have conversations about rising premiums but discussions should focus on value rather than price.
Customers should also be advised on the benefits of having a professional valuation and regularly assessing their limits of liability. Where circumstances have changed, customers need to inform their broker and/or insurer at the earliest opportunity. Brokers can also help to identify any gaps in cover which may not be immediately obvious; cyber risk is a case in point which has arguably become even more relevant with the large-scale move to working from home and shifting operations online. It’s also helpful to recommend risk management measures, such as maintaining a current business continuity plan and/or checklist.
Insurers will undoubtedly benefit from the increasing amounts of data available, allowing them to better understand customers’ requirements, tailor solutions accordingly and innovate in new product lines. It will be key for the industry to understand how businesses have had to change and adapt and ensure that products still deliver value in a post-Covid environment. Hopefully no more pandemics are on the horizon but the industry needs to prepare itself in any event to be there for customers in their time of need.
References
1. British Insurance Brokers’ Association. 2021 Manifesto: Resilience. p11
2. Office for National Statistics. GDP first quarterly estimate, UK: October to December 2020
3. BBC News. How much is Covid costing the UK and how will we pay? 22 June 2021.
4. pwc. Store openings and closures – 2021.
5. Insurance Tomorrow Podcast. Underinsurance and the Insurance Industry.
Commentary and guidance in this article are provided for information purposes only and are not intended to amount to advice on which reliance should be placed.  Readers should seek further advice when dealing with their individual and particular situations. Allianz Insurance plc shall have no liability for any action taken as a result of and in reliance on the information contained in this article.