Whilst underinsurance is by no means a new concern for the insurance industry, the combined effects of Brexit and Covid-19 have served to shine a spotlight on this perennial issue.
Covid-19 and Brexit – a double whammy
In 2020, Britain’s economy shrank by 9.9%, which was the largest annual fall in UK GDP on record. Between April 2020 and 2021, government borrowing reached record levels of £229bn, 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.
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.
Doing the sums
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.
Reasons for underinsurance
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 for brokers, which provides information on factors to be considered in an insurance valuation, from buildings to contents and stock.
Proceeding with caution
Brokers and insurers supporting customers
2. Office for National Statistics. GDP first quarterly estimate, UK: October to December 2020
3. BBC News. 22 June 2021.
4. pwc. 5. Insurance Tomorrow Podcast.