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Taking stock: setting an appropriate stock sum insured

At a glance

  • Establishing an appropriate stock sum insured is essential to a customer’s cover operating effectively
  • Proper consideration of business trends can avoid underinsurance and save on premium spend
  • This guidance can help you get the most from your property insurance

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By reading this article, and correctly answering the three questions underneath, you will have achieved the following learning outcome: Identify the most common causes of underinsurance.

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Setting the correct sum insured is one of the most important considerations when insuring property. Sums insured determine the amount you receive in the event of a claim, and also form the basis of the premium calculation.

When setting the stock sum insured, the figure should represent the maximum value at any one time. To do this, you will need to consider a number of factors, which will be different for each individual customer.

What is the value of your stock?

Most insurance policies only cover the cost price of stock, excluding any anticipated profits. Therefore, where the business can reclaim Value Added Tax (VAT) this should always be excluded.

Businesses all use stock in different ways: a newsagent is likely to only sell finished goods, whereas as a furniture maker will have stock at various stages of the process, all with different values and associated costs.

It is therefore important to determine the maximum value of stock at all the different stages of a business’s operation:

  • Raw materials – the market cost of materials, including costs such as freight, unloading, storage costs and irrecoverable taxes and duty.
  • Work in progress – factors in the cost of raw materials and any manufacturing costs directly incurred, including direct factory overheads.
  • Finished goods – the net manufacturing cost of finished goods. Or, for many businesses, the purchase cost, including expenses such as freight, unloading, storage and irrecoverable taxes. The sale price should not be used, unless specifically agreed with insurers.
  • Waste materials – certain waste materials will have a commercial value and a market rate.

By splitting ‘stock’ into its components, you will be able to achieve a much more accurate stock sum insured.

Accounting for peaks and troughs

Stock levels do not remain constant. Businesses hold different amounts of stock depending on a number of factors, such as increases in demand at different times of year.

As the stock sum insured needs to reflect the maximum possible loss at any one time, any trends must be included.

Many polices, such as Zurich’s Shop policy, offer assistance by including an automatic seasonal increase extension at no extra charge.

An example term might be: “automatically increase the Sum Insured for Stock by 30% during the following periods: (a) 60 days before Christmas Day to the twentieth day following, (b) 30 days before Easter Sunday to the twentieth day following.”

The exact parameters of any seasonal increase extension will vary between policies. It is therefore important that brokers evaluate each policy and determine whether it caters for their particular customer’s needs.

It may be that a business is never busy at Christmas or Easter, but their stock levels peak significantly during the summer. In which case brokers may wish to discuss a bespoke endorsement with the underwriter, or, if this is not practicable, the underlying stock sum insured will need to reflect maximum levels during their busiest period.

Getting the most out of stock cover

By fully understanding how cover operates, you can add real value to your policy by tailoring the underlying sum insured to your specific needs.

Getting stock sums insured right will help customers save on premiums, while making use of seasonal increase extensions, where appropriate, can help avoid underinsurance.

For more information on setting the correct sums insured, please speak with your local Zurich contact.

Find out more and access helpful guides and insight with our new UnderinsuranceFire and Flood Risk Resources.

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