Inflation is now rising at its fastest rate for over 40 years, with a number of global events being the cause. In the UK; the ramifications of Brexit, closely followed by the Pandemic and the war in Ukraine, has led to serious disruption in global supply chains, shortages in the labour market and the cost of goods and materials rapidly increasing.
Therefore, it is of no surprise that claims of inflation (which for many is a new phenomenon) are likely to have a dramatic effect on index linking over the coming months and possibly years. Index linking (within the general insurance industry) refers to when insurers make sure that an asset’s insured value adjusts in line with changes from inflation and the cost of living. However, whilst index linking will protect clients from underinsurance in respect of their Building and Contents sums insured, there is often an underinsurance risk for their valuables; such as but not limited to, fine art, jewellery and collectibles, as these are not included in the index-linking within the policy.
We suggest that everyone should get up-to-date valuations in order to prevent disappointment with a settlement in the event of a claim. To demonstrate, here is an example:
A client who had their Rolex stolen had the watch correctly insured in 2020 for an agreed value of £29,950. When the watch was unfortunately stolen in 2022, the replacement cost of a second-hand equivalent would be £52,000. The value had almost doubled in two years!
An alarming stat regarding underinsurance that many brokers find themselves facing is that 80% of UK properties are underinsured and those properties are on average only insured for 68% of its true value.
In fact it can be the case that insurers may apply an ‘average clause’ element. This is a clause within the insurance policy that states the policyholder must bear a proportion of any loss, if assets were insured for less than their full replacement value. If the insurer finds the client or business has taken out inadequate insurance, it can reduce the settlement by the same percentage of the asset that is underinsured. Here is an example:
A property has a reinstatement value of £2.7 million on an insurance policy and needs to claim £400,000 for repairs due to fire damage, it would seem that cover is adequate. However, if the insurer can establish that the total cost to rebuild the property is actually £3 million, the insurer can claim that the policyholder had inadequate cover in place (in this case cover amounts to 90% of the property value, so there is a 10% shortfall or ‘underinsurance gap’).
Under the average clause, the insurer can then reduce the claim amount by the same proportion as the amount of underinsurance (10%), so a £400,000 claim becomes £360,000. As a result, this leaves the client or business financially liable for the £40,000 difference, even though they had £2.7 million of insurance in place.
With the current circumstances, we would urge you to have up-to-date valuations and/or assessments completed. Get in touch with us for a free review today!