At a glance
- Underinsurance is a common and persistent problem for the insurance industry, with incorrect or out-of-date valuations being a common cause
- Despite the importance of valuation services, many customers choose not to undertake them, often due to perceived high costs
- We explore common mistakes made and how valuations can add value to businesses
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Without being aware of it, a large number of UK businesses are gambling with their ability to bounce back after a major loss, by chronically underinsuring themselves.
Underinsurance leads to policies not functioning as intended, ultimately resulting in customers receiving less compensation than they need to adequately recover from a loss.
Despite the dangers of underinsurance, research conducted by the Building Cost Information Service suggests that the level of underinsurance in UK commercial property could be as high as 80%. Not only limited to larger companies, SMEs are also at severe risk of underinsurance, with a 2016/17 survey showing that 44% of business interruption policies were, on average, underinsured by 44%.
Incorrect or out-of-date valuations are a major cause of underinsurance and in some cases could also see customers being overinsured and overpaying.
Why conduct valuations?
A common mistake is simply considering the purchase price of a piece of machinery or a building and failing to take into account the replacement and reinstatement cost. Employing a valuer takes these complications out of the process and ensures the necessary sum is insured.
Crucially, valuers can also help customers identify their biggest and most important assets, including buildings, machinery and plant, and help pin down the costs involved with certain loss scenarios. This is particularly important within smaller businesses or those without large procurement departments.
Professional valuations can also add accuracy, one way of doing so is by taking the price paid for an item, and adding depreciation over time. Ultimately, getting a professional valuation is essential to avoiding the dangers of underinsurance.
How often should valuations be undertaken?
A common misconception is that valuations are expensive and need to be conducted regularly and in full. However, if a full and accurate valuation has been conducted in the past and nothing significant has changed in the interim, it is often sufficient to conduct a substantially cheaper desktop reappraisal, which might be cheaper than you think.
How and why can valuations change over time?
Changes in supply and demand and other associated factors are likely to influence valuations, for example the current fluctuation in exchange rates and major political events, such as Brexit..
Changing legislation can also influence valuations. In older premises, the cost of replacement and reinstatement could be affected by anything from changing thermal insulation legislation to new building standards. All of these factors make it much more challenging to come to an accurate valuation without the support of specialist valuation services.
For more information on the issues discussed in this article, please get in touch with your local Zurich contact.