Insurers going that little extranet to tackle rising underinsurance

Underinsurance remains a major issue for the market, with many insurers now looking to use technology to close the gap.

Brokers and underwriters recognise the growing issue and potential impacts of it, with Gallagher having undertaken research that found over four in ten (46%) commercial properties were underinsured, with the average shortfall being 40%.

This significant gap between the correct valuation of properties is being caused by the UK’s inflationary environment, with the cost of materials alone increasing by 36% since 2020 and labour costs up 7% in the last year.

According to claims managers, material and labour costs are the two biggest contributing factors leading to the current underinsurance problem, with six in ten (63%) of surveyed suppliers citing these pressures, which are exacerbated by current challenges such as supply chain disruption, raw material shortages and worker shortages.

Phil Daly, claims director at Gallagher, said: “This data shows how important it is for property owners to work with a risk management specialist when insuring their property, as those that don’t are leaving themselves at significant financial risk. Clearly, our research shows that the issue of underinsurance is not going away and has actually increased over the last five years.

“This poses a significant threat to businesses, which may find themselves having to foot some of the costs of rebuilding or repairing their premises. Challenges such as supply chain disruption and increased demand for materials means that owners could face longer repair times, which carries a serious risk of business interruption.”

Educating clients

Insurers say that they are fully aware of the issues and have been taking steps to work with brokers to highlight shortfalls and provide the data brokers need to educate clients.

Nikki Lidster, head of SME at Zurich UK, told Insurance Times: “Underinsurance remains an issue and can occur for several reasons. For instance, rising property values where insurance coverage may not be reflected to the current value of the asset, changes to business operations and some customers not fully understanding their insurance needs, albeit this is significantly mitigated by the work that our broker partners do to support our mutual customers.

“It is important for customers to regularly review and update their insurance coverage to ensure it adequately reflects their current needs and circumstances.”

Aviva’s head of underwriting transformation, Jason Chambers, also noted that underinsurance remains a huge problem for the market.

He explained: “At present, we see higher levels of underinsurance in our digital book than in our regional book. There are those who have not updated their sums insured for some years and we have some who have not updated their sums insured for over four years.

“We know the costs of materials and claims have risen in the time and we are keen to engage with brokers and their clients to ensure that have an adequate sum insured.”

Chambers added there was often a lack of understanding around the difference between the rebuild and resale costs of property, which is another issue that needs to be addressed.

“[Customers] are after trusted advice,” he explained.

“Insurers have the data which can allow for better advice, but we find that a sizable proportion of clients who increase their sums insured do so by an amount that is still not enough.

Too little, too late

Explaining the dangers of underinsurance, Chambers added: “If the sum insured is currently at £1m and we believe it needs to be £2m, we see some insureds who will move it up to £1.5 million.

“Clients will go to brokers and say, ‘I have a budget for insurance, so make it work’.

“Our role is to put the customer together with the broker to make an informed decision. Clients may come to a different decision, but we need to ensure they understand the consequences.”

Chambers also noted that roughly 40-60% of the proposals Aviva receive required a discussion around underinsurance and, of those, many cases saw underinsurance of 60% or more of the figure deemed to be adequate.

“When we highlight the shortfall, we find around a third will increase the sum insured to the necessary level, a third will increase the sum insured but not to the recommended figure and the final third will keep the figure at the original valuation.”

Tech solutions

Technology is playing an increasing role in combating underinsurance, with insurer extranets becoming a significant weapon in the fight to highlight concerns at the beginning of the insurance buying process.

“No business wants to find itself underinsured following loss.”

Lidster explained: “Across all of Zurich’s eTraded products, Zurich Online and Open Market, we have a multi-faceted approach for tackling underinsurance.

“Firstly, having the right level of cover to meet our customer’s needs is critical, so we leverage data enrichment to identify those who may be significantly under, or over, insured.

”All of our property products are average free, which helps give our customers peace of mind that we will be there should they be unfortunate enough to need to make a claim.

“In addition, Zurich Resilience Solutions (ZRS) provides a landscape of risk management services to ensure customers have access to the support they need to help protect their business and mitigate risk.”

Chambers said the use of its extranet had become a significant tool in Aviva’s efforts to highlight underinsurance and aid brokers in raising the issue with clients.

He said: “We know the number one reason to use the extranet is the ability to access instantaneous quotes.”

However, Chambers said the systems that Aviva operate will look at the risk and the proposed sum insured and then, if there looks to be a disconnect, will flag the issue to the broker.

He explained: “In our system, we have embedded and implemented a step to notify a broker that has keyed in a sum insured to look at whether the sum is accurate or not.

“If they key in a sum insured of £100,000 when our systems believes that the data in the risk means it should be £200,000, we will highlight the difference. Or if we have concerns, we will ask for more information and recommend an independent valuation.”

Nick Hobbs, chief distribution officer at Allianz Commercial, told Insurance Times: ”The issue of underinsurance continues to present a significant issue, even as inflation normalises.

”Research earlier this year by Allianz revealed that 42% of SMEs that own their premises do not know the rebuild value of their buildings. Of those who had calculated the rebuild value of their property, just over half (51%) had a professional valuation, whereas 39% used market value and 10% self-valued their property.”

Hobbs added that despite these concerns, only 19% of small business owners increased their sums insured in the past year, while just 12% increased their insurance indemnity periods. 

He continued: “No business wants to find itself underinsured following loss.”

Allianz runs its own underinsurance hub, which provides educational resources for brokers and customers about mitigating these risks and can illustrate the financial consequences of being underinsured. 

Hobbs concluded: ”Working with broker partners and with Biba, we’re determined to continue to raise awareness of this issue and provide the best support possible to customers, so when they make significant changes, we can help make sure this doesn’t lead to gaps in their cover.”