At a glance
- Underinsurance is a persistent problem for the industry, and brokers can often feel powerless to combat it
- However, brokers should see the resolution of underinsurance as an opportunity to differentiate themselves from the competition
- Zurich offers four top tips to remove underinsurance from your book of business
Underinsurance can result in inadequate claims settlements, dissatisfied customers and, potentially, litigation for brokers who have not taken steps to prevent it. With customers typically responsible for specifying their own sums insured, brokers can often feel powerless to combat underinsurance.
While brokers are not expected to calculate figures on their customers’ behalf, recent litigation has made it clear they do have a duty to provide adequate explanations. They should take steps to ensure customers fully understand the meaning of key terms such as insurable gross profit and how it differs from the accounting definition of gross profit. Insurable gross profit is a more complex calculation that takes into account opening and closing stock, work in progress and uninsured working expenses.
There are some simple steps brokers can take to ensure their customers have the right level of cover in place. Zurich looks at four key ways to stamp out underinsurance.
1. Educate your customers on the Total Cost of Risk
Only by understanding the Total Cost of Risk (TCOR) can businesses make informed decisions about how to manage the exposures they face and avoid underinsurance.
However, there are still misconceptions about TCOR, and most people assume it refers to insurance premiums alone, but by recognising all of the costs, your customers can implement strategies to reduce them.
TCOR is calculated using a business’s insurance premiums, direct costs, indirect costs and risk management expenses.
Brokers can help educate their customers on TCOR, and on the crucial role it plays in allowing decisions to be made about the trade-off between self-insurance, insurance and risk management investment.
2. Encourage regular valuations
A majority (63%) of brokers cite failure to carry out regular valuations/assessments as the main cause of underinsurance, according to research by the Insurance Times.
Calculating sums insured
Knowing the theory behind each calculation is one thing, but there are several factors that can affect property valuations, business interruption calculations and the adequacy of indemnity periods.
Buildings, for example, are subject to a constantly changing landscape that can affect their valuation. Availability of materials, fluctuating labour costs, and planning regulations stipulating a lower environmental impact, all have the potential to significantly change a final reinstatement cost.
Regular professional valuations are the best way to ensure adequate sums insured. The cost of engaging a valuation specialist will be minimal compared to the potential shortfall in claims settlement, should a customer suffer a major loss for which they were underinsured.
3. Pay attention to business interruption
Business interruption (BI) is a particular problem area for underinsurance. In particular, there is widespread confusion among customers over insurable gross profit, and how it differs from an accountant’s gross profit calculation.
Indemnity periods are also commonly found to be inadequate, which can mean claims payments cease before a customer has had a chance to recover. Ross MacPherson, Director at QuestGates, one of Zurich’s partner loss adjusters, explains: “Customers regularly choose a 12-month maximum indemnity period, believing this to be adequate, but in reality it is not.
“For example, there could be planning issues, or difficulties in procuring machinery and plant, all of which can mean a business may not recover as quickly as anticipated.”
According to the Chartered Institute of Loss Adjusters, 37-52% of BI policies are underinsured with an average shortfall of 45-63%. This presents a real opportunity for brokers to educate their clients and differentiate themselves from their competitors.
Our free Business Interruption Calculator is now available to help you and your customers arrive at the correct sums insured and indemnity periods.
4. Help with business continuity planning
While insurance can indemnify customers for any losses incurred, an effective business continuity plan can make a great difference to the size of those losses, not to mention a customer’s ability to continue trading and make a full recovery.
“Customers regularly choose a 12-month maximum indemnity period, believing this to be adequate, but in reality it is not.”
Ross MacPherson, Director at QuestGates, one of Zurich’s partner loss adjusters
Planning for major loss scenarios can also help prevent underinsurance. By having plans in place to minimise loss and recover more quickly, customers can reduce the risk of exceeding sums insured and indemnity periods.
Business continuity planning has emerged as a popular way for brokers to add value to their service offering.
By following the four simple steps outlined above, brokers can put themselves in the best possible position to win and retain business, while achieving the best possible outcomes for their customers.
For more information on how we can help protect you and your customers against the risks of underinsurance, please speak with your local Zurich contact.