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Don’t risk underinsurance – protect yourself against inflation now

November 14, 2022

Rising inflation could leave businesses underinsured and facing unwelcome surprises. It’s time to reassess sums insured, limits and indemnity periods to avoid unexpected gaps in cover and keep control of premiums.
Casualty|Property Risk and Insurance Solutions
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A perfect storm of factors, including the war in Ukraine and the global energy crisis, have caused a major spike in inflation that looks set to last well beyond 2022.

In many countries, rising interest rates and volatile exchange rates are exacerbating the impacts.

Meanwhile costs that impact insurance claims have been increasing faster than headline inflation for over a decade influenced by factors such as supply chain issues, rising legal costs and shortages of materials and labour.

So what does this mean for insurance contracts?

What should businesses be doing to mitigate the impact and make sure they continue to get the cover they need?

The impact on valuations, costs and limits

The value of some goods and materials have increased by more than 50%, far above the headline rate of inflation, affecting the cost of reinstatement – something that is easy to underestimate in a rapidly moving situation.

Schedules of values for property and equipment from earlier years suddenly look a long way from reality.

Likewise, calculations of gross profit for business interruption cover based on pre-2022 sales and commodity prices may now be out of date.

Limit sizes that might have been adequate in 2021 may fall short and leave businesses with significant exposures.

Rebuilding delays caused by supply chain disruption and shortages could also make business interruption limits and indemnity periods inadequate.

On the casualty side, claims settlements and awards made by courts, will be adjusted by inflation, pushing up the cost of third-party liability claims.

How are insurers responding?

It’s no surprise that insurers are taking action to protect themselves.

Many are putting restrictions into terms and conditions to limit cover and reduce their exposures – for example, setting stricter caps on any inflationary increases in payments over the scheduled values.

Likewise, more insurers are imposing averaging clauses, which allow them to pay only a proportion of a claim if they find that the client is underinsured on their policy.

Whereas insurers may have previously let simple property claims go through based on average reinstatement values, now they’re questioning claims of a higher value and referring back to the schedule of values.

This can result in a protracted loss adjustment process.

If they find the values were too low, they may not pay the full value of the claim.

Taken together, all of these measures can increase an organization’s uncertainty about what’s covered and whether payouts will match the full extent of actual losses.

What you can do to mitigate the impact

Reassess your schedule of values

Are sums insured adjusted to the latest inflation numbers, reflecting the cost of rebuilding rather than the commercial value?

Insurers will want to see evidence of this at renewal.

They will check values against their own cost indices – if your values are out, they’re likely to increase premiums or impose restrictive terms.

Use a good valuer

If you’re doing a full revaluation, use a professional valuer with a solid reputation in the market.

If insurers see a well-prepared realistic submission, they’re much more likely to be flexible and negotiate terms.

Rethink your insured limits

Are your insured limits sufficient in the current environment?

Rising claims costs will erode limits quickly.

As discussed above, insurers may pay only a proportion of claims if they find you’re underinsured.

Make sure you have the capacity you need to manage your risks effectively.

Check your indemnity period for business interruption

With ongoing supply chain and labor shortages, repair and reconstruction projects are likely to drag on.

If a project is likely to take more than 12 months to complete, you may want to consider a 24-month policy.

Review your business continuity plans

Take a deeper look inside your organization and supply chain to see if there is any extra back up capacity you could call on in a crisis.

It might enable you to buy a targeted business interruption limit that’s more affordable and helps reduce the impact of inflation.

Revise your mitigation plans

Look again at the cost of planned mitigation projects to improve your risk profile.

If there’s likely to be a shortfall, consider increasing the budget.

This may pay for itself in the longer term as it sends out a positive signal about your ability to control your risks, which can translate into better premiums and terms.

How can WTW help?

We can help you make sure you’re fully prepared so you get the best deal in the market.

Our global scale means we understand how trends, such as inflation, are affecting whole industries and geographies.

This enables us to help our clients better understand and manage their exposures.

If you have concerns about your valuations or renewal submissions, talk to us and we’ll help you work them through and present the best case to insurers.

We can help you review your valuations, adjust your business interruption loss estimates, or find a reputable valuation company if needed.

Contact

Dylan Ng
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