Underinsurance And How To Help Clients Avoid It
How brokers can help their customers avoid underinsurance
Underinsurance is one of the most common – and costly – issues facing policyholders. Brokers are in a unique position to help commercial clients understand the risks and take proactive steps to avoid their assets being inadequately covered.
What is underinsurance?
Underinsurance occurs when a policyholder doesn’t insure their business assets for their full repair or replacement value. Unfortunately, policy holders are often unaware of the impacts that underinsurance can have at claim time if they get this wrong.
If a business is underinsured, the insurer may not be required to pay a claim in full or pay the full policy limit. Instead, the insurer would reduce the claim amount to the proportion and extent that the asset was underinsured.
Discussing underinsurance with policyholders can incentivise them to regularly review the value of their assets to allow the insurer to accurately price and assess the risk.
How does underinsurance occur and what are the impacts?
Let’s look at a specific example. Imagine a bakery insures its stock and contents for $60,000 when it first opens.
Five years later, a fire breaks out. The fire is quickly extinguished, but the damage is significant. The bakery is forced to close for repairs, leading to major business disruption and lost revenue.
When the owner submits a claim, they discover their equipment and stock are now worth $100,000 – much more than they originally estimated. Because the business was underinsured, the insurer reduces the payout to reflect the shortfall in coverage. The business not only receives less than the full value of the loss – it may not even receive the full $60,000 sum insured limit.
It's important to note that claims which don’t result in total loss are also exposed to underinsurance.
Why is underinsurance becoming more common?
A growing number of factors are fuelling a sharp rise in underinsurance-related claim escalations – and it's becoming an all-too-familiar issue:
- Inflation and rising costs: Rising material, labour, and service costs have driven up rebuild and replacement expenses, yet many insured values remain outdated.
- Natural disasters: More frequent and severe weather events increase the risk of loss and the cost of repairing or rebuilding after these events.
- Business growth: As businesses grow, so do their assets, but policies are often not updated to reflect them.
- Regulatory complexity: Heightened legal and regulatory requirements can lead to increased exposures and hidden costs.
Even small discrepancies in insured values can result in major financial losses for policyholders at claim time.
How can policyholders be better protected from the risks of underinsurance?
There are several ways brokers can help policyholders avoid underinsuring their business:
Educate clients
Take proactive steps to ensuring clients understand what underinsurance is and what it can mean for them at claim time, especially about the potential impact of averaging provisions.
Encourage regular valuations
Consider helping policyholders see the importance of regularly updating their asset valuations. This ensures that the coverage remains adequate to account for fluctuations, inflation and other market factors.
Conduct regular risk reviews
Encourage regular risk assessments and coverage reviews, especially if the business has expanded, purchased new equipment, or moved premises.
Collaborate across the industry
Insurers and brokers need to work together to review and modernise practices, policies, and regulatory frameworks to keep pace with the evolving risks and needs of our customers.
Risk Management with Vero
Tackling underinsurance requires a proactive, informed approach — and that’s where brokers and insurers can make a real difference. By helping businesses understand their risks and adjust their coverage accordingly, we can ensure they’re better protected if the unexpected occurs.
At Vero, we’re proud to have one of the largest and most experienced risk engineering teams in the Australian market. Our experts support both local and global customers across a vast array of occupations and insurance product lines.
Disclaimer:
Insurance issued by AAI Limited ABN 48 005 297 807 trading as Vero Insurance. Read the Product Disclosure Statement before buying this insurance. Target Market Determination is also available. This advice has been prepared without taking into account your particular objectives, financial situations or needs, so you should consider whether it is appropriate for you before acting on it.
The information is intended to be of a general nature only. Subject to any rights you may have under any law, we do not accept any legal responsibility for any loss or damage, including loss of business or profits or any other indirect loss, incurred as a result of reliance upon it – please make your own enquiries.
