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How can valuations help to avoid underinsurance?

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  • Underinsurance is a common and persistent problem for the insurance industry, with incorrect or out-of-date valuations being a common cause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 how valuations can add value to businesses and how Zurich can offer help by recommending trusted suppliers

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%.

Incorrect or out-of-date valuations are a major cause of underinsurance and in some cases could also see customers being overinsured and overpaying.

Zurich’s partnership with external valuation specialists can ensure that both brokers and customers have access to the regular professional valuations necessary to get their policy levels right.

Why conduct valuations?

“The insurance contract is all about putting the customer back in the position they were in before the loss,” explains Mike Green, Underwriting Manager at Zurich.

“Often we can overcomplicate this, but the fundamentals of putting the customer back in the same place is making sure they get the full value of the loss. In addition, from our point of view as insurers, we need the correct valuation to base our premium on.”

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.

As Mike explains: “When a customer has suffered a loss, the last thing they want to be worrying about is whether there is enough money to cover a full reinstatement.”

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. “The basic way an accounts team would value assets is by taking the price paid for an item, and adding depreciation over time,” explains Mike.

“A professional valuation can enhance this process by working out whether there is over- or under-capacity for an item and whether the price a customer paid at the time was over or under market value.”

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, and with the support of Zurich’s relationships, it might be cheaper than you think.

Mike explains: “It is a myth that customers will have to pay for a full valuation every time, and asking about valuations does not mean that they will be pressured into conducting an expensive valuation process again from scratch.

“Most of the legwork and costing up will have been done in the first visit. Valuations after this point are usually a case of building on good practice and bringing the valuations up to date.”

How and why can valuations change over time?

Changes in supply and demand and other associated factors are likely to influence valuations. “Particularly relevant at the moment are fluctuations in exchange rates and major political events such as Brexit,” explains Mike.

“Given the worldwide nature of manufacturing, most specialist equipment needs to be imported, meaning that exchange rate fluctuations can have a big impact on value.

“It is also increasingly common for items to be made to order, meaning that there are not always stockpiles of resources in the way there used to be.”

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.

Ultimately, there are a large number of factors likely to influence valuations and this complexity is why Zurich has partnerships with a suite of specialist valuation providers.

By making the most of Zurich’s relationships with these external valuation specialists, brokers and their customers can ensure that nothing gets missed.

For more information on the issues discussed in this article, please get in touch with your local Zurich contact.

You can also find out more and access helpful guides and insight with our new UnderinsuranceFire and Flood Risk Resources.

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