Mind The ‘Insurance Gap’: Inflation And Adequate Cover

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Having insurance cover certainly provides peace of mind.

Yet the reason why we put cover in place is more than merely psychological.

It means that should our loved ones, our property or our businesses experience theft, damage or death, we will either be able to repair the physical or commercial injury, or be adequately compensated for our loss.

When it comes to property, for instance, an important part of that process is establishing an accurate valuation at the very outset.

That ensures that you may be totally reimbursed should you have to make a claim.

Should you not cover up to an item’s full value, then something known as the ‘average clause’ in many policies kicks in. As a result, any claim will not generate a full payment but a sum proportionate to the amount of cover.

If, for instance, you had £50,000 cover arranged for a £100,000 house which was totally destroyed, you would only receive half that property’s value.

In the event of £20,000 damage to the same home, you would only be eligible for a £10,000 payout from your insurer.

However, in the last few years, another very real and very relevant challenge has presented itself.

The cost of carrying out house repairs has risen considerably due to the impact of extra duties created by the UK’s withdrawal from the European Union and, more recently, inflation on materials and the availability of skilled tradespeople.

Data published by the Government in the last few weeks has made clear what that means on a practical level.

Ready-mixed concrete now costs 21 per cent more than it did a year ago, while steel and wood have increased by 40 and 24 per cent respectively.

In fact, if we look at a notional basket of products generally needed for repairs, they cost 51 per cent more in June this year than they did in the same month in 2017.

It is part of a broader inflationary pattern, exacerbated by the continued effects of Russia’s invasion of Ukraine, such as rising fuel costs, which the Office for National Statistics (ONS) has identified as having severe consequences for a variety of different business sectors.

What that means from an insurance perspective is that a correct initial valuation is only part of the solution.

Insurance policies can include something known as a ‘day one uplift’ across the 12-month term that cover is in effect to take account of rising prices.

After all, two people could make identical claims on day one and day 364 of their identical policies but find that the costs involved in honouring them are radically different because of inflation.

As I’ve already explained, if those claims relate to property repairs or more expensive, luxury items, the shortfall could be considerable, given the rapid increase in the price of raw materials at the moment.

Insurers make a sliding scale of uplifts available – generally ranging from 15 per cent to 50 per cent.

Depending on the percentage decided upon by the policyholder, the total amount of cover will increase accordingly over the period of cover to meet possible increases in the price of repairs or replacements.

The greater the uplift, of course, the larger the total sum insured and, therefore, the higher the associated premiums.

If they decide on a small uplift to keep their premiums down, then there is a chance that they may be out of pocket because any claim in the event of subsequent mishap might not meet the full cost of the materials needed to put it right.

Perhaps unsurprisingly, though, many policyholders are unaware that uplifts exist – and that is where brokers come into their own.

We not only have a full conversation with clients about what needs to be insured and the likely cost of repair or replacement. We discuss with insurers about how much premiums may be and why that is the case.

Clients can, therefore, make a much more informed decision about whether to opt for full cover or to carry some of the financial risk themselves.

In my opinion, it is precisely the way that insurance should work: a complete disclosure about the assets being protected, resulting in cover which is appropriate to an individual’s attitude to risk management.

There is no right or wrong approach to risk. It only becomes clear whether there was sufficient cover in place as and when a claim needs to be made.

One thing is apparent, however. The increase in material costs shows no sign of abating just yet.

With many insurers reporting a dramatic increase in claims relating to subsidence due to severe weather, for instance, it may quite literally pay to review home cover to avoid a nasty and expensive shock.

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Written by Martin Lilley, Director of Corporate

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