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What personal lines customers need to know about underinsurance

At a glance

  • One in four UK households could be underinsured
  • Some customers mistakenly underestimate cover, as they don’t fully understand their insurance requirements
  • Customers need to regularly review sums insured to ensure cover remains suitable and up-to-date

This article counts towards accumulating your annual CII CPD structured learning hours for Underinsurance.

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.

Visit the CPD Hub to log in and begin accumulating CPD hours.

One in four UK households have no contents insurance, according to the Association of British Insurers, putting them at risk of underinsurance. Underinsurance can result in claims being rejected, additional premiums being requested or settlements being proportionally reduced.

Some customers mistakenly underestimate cover as they don’t fully understand their insurance requirements, and you should use this opportunity to demonstrate your value.

1. Understand ‘sum insured’

Some customers may not fully understand the term ‘sum insured’. When assessing belongings, many might think in terms of historical purchase prices or current market values, which is likely to result in underinsurance.

It is important to understand that the figure required for insurance is the amount it will cost to replace all their belongings on a new-for-old basis at the time of loss, or in the case of buildings, the cost to fully rebuild the property in the event of a total loss.

When dealing with a ‘specified sum insured’ policy, where a customer chooses the exact amount to be insured, it is particularly important to arrive at an accurate figure. ‘Blanket cover’ policies provide standard limits, for example £1,000,000 for buildings and £100,000 for contents. These policies tend to reduce the risk of underinsurance, as customers only need to ensure that their property values do not exceed internal policy limits.

2. Identify inner policy limits

Every policy wording will be different and it’s important for customers to understand these differences in order to be adequately covered.

Inner policy limits are especially significant. For example, many blanket policies specify a limit for valuables and each insurer may define ‘valuables’ differently. Therefore, it’s important to read the relevant terms and understand how the policy defines them. Otherwise, certain items could exceed inner policy limits depending on the definition of ‘valuables’. Customers can then make an informed decision on how to group and value different items to arrive at a suitable sum insured and to ensure a product meets their specific needs.

3. Be aware of commonly underinsured goods

At the point of a claim, many insurers will require evidence for all items valued at more than £5,000 in the form of a professional valuation. Jewellery usually falls into this category and can be a common source of underinsurance.

Jewellery can be problematic for a number of reasons:

  • Gold and silver prices can fluctuate considerably from year to year
  • Items are often inherited from family members and their true current value may not be known
  • Jewellery is sometimes purchased abroad, where prices are significantly less than the cost to replace an item in the UK

Where you identify that a sum insured includes items of jewellery, it is essential to appreciate the importance of determining its correct value. It’s vital that regular valuations of jewellery are carried out to ensure that items are not underinsured. We recommend that these items are revalued at least every five years.

4. Conduct regular reviews

Insurance requirements should be reassessed at least every couple of years. We are all constantly acquiring new possessions and the value of those items is always changing. For example, a change in the price of gold might significantly increase the value of a piece of jewellery, or an additional laptop, tablet or wearable technology could cause an inner limit to be exceeded if the definition of ‘valuables’ in the policy includes audio electrical items.

Customers going through a life event, such as getting married or having a child, should certainly be prompted to reassess their sums insured to determine whether current cover remains suitable.

It is also important for customers to review their buildings sums insured, particularly if they have a sum insured contract or they have held the policy for a long time. This should always be on the current rebuilding cost, rather than the market value.

Contact your Zurich Account Executive to discuss how they can help you reduce the risk of underinsurance.

Image © Getty

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