For insurance to fulfil its objectives, the cover you purchase needs to accurately reflect your business requirements. Insuring assets for incorrect values, or setting cover limits too low, is likely to result in underinsurance.
The truth is, sadly, you only know the true value of insurance in the unfortunate event of a claim. Underinsurance occurs when you have not taken out the right amount of insurance cover for your needs. There will be a variety of factors to take into account when you assess how much insurance you need.
The problem for many businesses and particularly mid-to-high net worth individuals is that getting the right sums insured is often complex and the values in question can change quickly.
Underinsurance can lead to policies not operating as intended, delivering less indemnity than needed following a loss, and jeopardising an organisation’s ability to recover. Underinsurance occurs when cover is set too low to adequately meet a policyholder’s needs. It is reported that 90% of properties are insured for wrong amount. More than 70% are underinsured, on average only covered for two thirds of correct rebuild cost.
When approaching valuations, it is important to consider how this happens in practice following a loss, factoring in all associated costs to your sums insured. For example, if you need to replace an office computer system, it is not just the cost of purchasing new equipment. Additional expenses may include IT consultancy fees, freight and installation. It is important to avoid simply using balance sheet values or historical purchase prices to inform sums insured, as these are often significantly different to an item’s actual value for insurance purposes.
Insurance is an essential business component, transferring risk and providing much-needed financial security. However, for insurance to fulfil its objectives, the cover you purchase needs to accurately reflect your business requirements.
Despite its serious consequences, underinsurance remains common and it is important to avoid simply using balance sheet values or historical purchase prices to inform sums insured, as these are often significantly different to an item’s actual value for insurance purposes.