UK brokers warn of underinsurance as policyholders pinch and asset values rise
UK insurance brokers are warning that underinsurance in the commercial property market could worsen as rising prices and inflation in asset values coincide with a squeeze on policyholders’ ability to pay premiums .
Underinsurance is “the big story in our market, certainly for the rest of this year”, according to Simon Collings, managing director of national brokerage and placement at Arthur J. Gallagher & Co. in the UK.
The insurance industry penalizes underinsurance in commercial property with a proportional reduction in claims based on a principle known as averaging. If an insured insures a property for 15% less than its value, for example, insurers will reduce claim payments by the same amount.
Companies were so focused on staying afloat during the COVID-19 pandemic that they may not have made sure the sums insured in their policies kept pace with inflation in the value of insured assets, Collings said.
“The volume of claims adjusted for underinsurance is increasing dramatically,” he said in an interview at the British Insurance Brokers’ Association annual conference.
Faced with the rise in insurance prices, some policyholders have been tempted to reduce the duration of compensation for their home business interruption cover. But as supply chain disruptions lengthen repair and rebuild times, reducing claim periods to save money can be a false economy.
“If a claim period is 12 months, that’s an immediate red flag for me for most industries,” said Selena Kearvell, regional sales manager, North and Scotland at Marsh & McLennan Cos. Inc. Marsh Commercial Business in the UK. in an interview.
Price increases show no signs of stopping. Marc Lewis, head of commercial lines underwriting at Aviva PLC, said his company forecast claims inflation of “more than 8%” through the rest of 2022 across several key lines of business.
Collings predicted UK property, accident and car prices would rise 5-10% over the rest of the year.
Part of a broker’s job is to explain why underwriters are driving up prices, in order to get a better deal for policyholders. But they find little fault with insurers’ current rationale for continuing to raise rates.
“Generally what insurers have said is absolutely right” over the past 12 to 18 months, Collings said.
This sentiment was echoed during a BIBA conference panel on market conditions. Carl Evans, managing director of the professional risk group at brokerage Griffiths & Armour, said while prices had risen significantly, they were still only at a long-term average.
“There is no element of profit or profit seeking in my own experience,” he said.
While continued price increases amid a general increase in all costs could prompt policyholders to reduce their insurance coverage, some industry players are optimistic that insurance spending will not be greatly reduced.
“I think what we’ll see is that consumers may be making different decisions about how they plan their budget.[s] rather than reducing the insurance premium,” said Seán Kemple, Managing Director of Close Brothers Premium Finance, in an interview at the conference. Although there is a bit of “cautious nervousness in the air,” most brokers still talk about growth, he mentioned.
Once a discretionary purchase, cyber insurance has become a staple for many businesses, including small and medium-sized businesses, despite rising prices and reduced availability of this type of coverage.
Kearvell said this was partly driven by large companies asking whether the SMEs that supply them had cyber insurance and undertaking cyber risk management as part of the bidding process. Small businesses themselves are also increasingly caught up in cyberattacks, Kearvell noted.
Policyholders may be able to mitigate the effects of rising property prices by ensuring they have captured asset value inflation. While getting the asset valuation right is a simple solution in theory, in practice it’s more difficult because “there’s a cost to it at a time when everyone’s in a rush,” Collings said.
Calculating the correct value of assets and avoiding underinsurance is important both for policyholders and for the image of the insurance industry. Adjusting prepayments for legitimate claims is “the last thing the insurance market wants to do,” Collings said.
“From a reputational and fair moral standpoint, the market is trying to do the right thing,” Collings said. “It’s very difficult to do that if they haven’t received the premium that was due for the risk.”