Released On 4th Jun 2024

Underinsurance - a continuing issue

All businesses are open to risk if they don’t have the correct level of insurance, and some, more than others, may be at risk of financial hardship as a result of being either underinsured or uninsured.

Although the UK is not currently in recession, continued economic uncertainty and low productivity means growth is expected to slow and we’re seeing evidence of businesses dropping aspects of cover.

Although not all insurance is a legal requirement, businesses need to ensure that they’re adequately covered against many of the risks they could be exposed too, so they aren’t left in a vulnerable position.

Here are some of the ways a business might be underinsured

Incorrect sums insured

When something goes wrong, businesses are covered for their ‘sums insured’, which is how much it would cost to reinstate the business in the event of a loss, up to a certain amount. If this isn’t calculated correctly, business could find themselves underinsured. An up-to-date inventory of all a business’s contents can help set the right sum insured. This needs to take into consideration everything in the premises. It should also reflect peak stock levels, rather than the average.

A change in business
Business needs may have changed. For example, revenue might increase; the terms of reference might change; or the business could switch from being privately to publicly owned. If changes like these occur, the business’s financial lines insurance, which covers financial loss and the costs involved with this, will need to be reviewed and updated. Businesses need to check their cover remains in line with their activities.

Incorrect valuation
It’s important the sum insured for buildings represents the full rebuilding cost of the property. Businesses shouldn’t use market value or valuations for mortgage purpose when setting their insurance Declared Value. More information can be found in Allianz’s Guidance notes for sums insured.

Without the correct level of business insurance, a business will have to pay for any compensation claims itself to cover the cost of replacement, such as tools and equipment, stock, repair of premises etc. These unforeseen costs could be catastrophic, especially for smaller business.

It’s also the case that some trading authorities and other organisations might require a company to have a certain level of insurance for a particular area in order to work with them, and so not having insurance in place could mean that the company fails to secure new business opportunities.

Regardless of the type of business, all businesses should review their insurance annually, or at any time there is a significant change to their business, including their financial lines cover, to ensure they’re not at risk.

This has been adapted from an article by Allianz which can be found here.

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