At a glance
- 80% of commercial properties could be underinsured by an average of 60% per property
- Changing factors in the market, as well as economic reasons, could be responsible for properties being undervalued
- Property owners need to consider multiple variables when assessing the adequacy of their insurance cover
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Valuations and risk assessments have become less of a priority to property owners in the face of an ever-shifting economy. As owners attempt to cut costs, the market has seen an explosion in the number of underinsured properties, not just in the UK, but around the world.
Emerging global risks, such as extreme weather events causing increased flooding and property damage, highlight the need for stronger coverage. In July 2014, Lloyd’s of London warned that the top 17 countries in the world had an insurance deficit of more than $168 billion.
The Building Cost Information Service, part of the Royal Institution of Chartered Surveyors, has also noted that in the UK, almost 80% of commercial properties could be underinsured by as much as 60%. For a £1 million property, that could mean a shortfall of £600,000.
Variables to consider when assessing the adequacy of a particular building sum insured
- Ground/ geological conditions
- Location – urban/rural, in a conservation area?
- Site conditions – accessibility, size, topography, proximity to water courses
- Construction materials – type, quality, availability
- Listed status
- Labour – availability, current cost increases
- Professional fees – additional use of specialist consultants
- Local authority planning fees
- Compliance with current building regulations – potential impact of 30%+ cost increase
- Basis of cover under your insurance policy
- Landlord and tenant responsibilities under the terms of the lease agreements (these are not always clearly defined)
- Older properties may contain hazardous materials such as asbestos and dealing with these appropriately will add significant cost to the work. If a professional reinstatement valuation survey has not been carried out and these issues have not been identified, then it is difficult to have confidence that the correct sums insured are in place
For more information, visit Building Cost Information Service.
Brokers are very aware of the problem, with nearly 60% of those taking part in a recent survey by Zurich/Insurance Times stating that commercial property was the most likely line of business to suffer from underinsurance. 51% also saw a failure to carry out regular assessments or valuations as the main cause of underinsurance, with too much focus on the price of risk transfer being a major factor according to 23% of those surveyed.
Since 2002, amendments to the Building Regulations have seen the cost of a rebuild rise dramatically, due to various factors, including the need for improvements in energy performance, the need for greater fire protection, an increasing cost of building materials, improved drainage and better accessibility.
A combination of these factors has resulted in increased insurance premiums to cover the escalating costs.
Speaking to the Insurance Age, Mike Dickinson, Sales and Marketing Director at broking and risk-management firm Russell Scanlan, said the current trend of underinsurance was recession-related. “Times are tough, and many people believe that because of the sluggish economy, their property is unlikely to have gone up in value,“ he said.
“That’s actually not the issue, as insurance policies are concerned with the re-building cost of the property rather than the market value, which can, in many cases, be very different figures.”
Mike also gave Insider his advice on avoiding the pitfalls of underinsurance. He told us: “To ensure that you don’t become a victim of this situation when you have a claim, the best advice is to get the property professionally valued and implement the findings of their report. There are a number of professional firms carrying out such valuations.”
For businesses, getting the sums right can be a challenge, one which is not helped by escalating costs within the construction sector, due to the rising price of materials and the difficulty in sourcing skilled tradespeople because of the recovery of the housing sector.
With building and labour costs fluctuating throughout the marketplace, it is easy to see how a building can end up being underinsured.
For more information please see our interactive infographic on calculating reinstatement values, or speak with your local Zurich contact.