U.K. insurance brokers are warning that underinsurance in the commercial property market could worsen as rising prices and inflating asset values coincide with a squeeze on policyholders’ ability to afford premiums.
Underinsurance is “the big story for our market, certainly for the remainder of this year,” according to Simon Collings, managing director of national broking and placement at Arthur J. Gallagher & Co.’s U.K. business.
The insurance industry penalizes underinsurance in commercial property with a commensurate cut in claims payouts under a principle known as average. If a policyholder insures a property for 15% less than it is worth, for example, insurers will reduce claims payments by the same proportion.
Businesses were so focused on staying afloat during the COVID-19 pandemic that they may not have made sure that the sums insured in their policies were keeping track with the inflation in the value of the assets being insured, said Collings.
“The volume of claims being adjusted for underinsurance is rising dramatically,” he said in an interview at the British Insurance Brokers’ Association annual conference.
Faced with insurance prices moving higher, some policyholders have been tempted to reduce the indemnity periods on their property business interruption covers. But because supply chain disruptions are extending repair and rebuilding times, cutting indemnity periods to save money may be a false economy.
“If an indemnity period is on 12 months, that’s an immediate red flag for me for most sectors,” Selena Kearvell, regional sales leader, North and Scotland at Marsh & McLennan Cos. Inc.’s Marsh Commercial business in the U.K., said in an interview.
Price increases are showing no signs of stopping. Marc Lewis, commercial lines chief underwriting officer at Aviva PLC, said his company is projecting claims inflation of “upwards of 8%” through the rest of 2022 in several key business lines.
Collings predicted that prices across property, casualty and motor in the U.K. would rise by between 5% and 10% over the remainder of the year.
Part of a broker’s job is to unpack why underwriters are pushing prices up, so as to get a better deal for policyholders. But they are finding little to fault in insurers’ current rationale for continuing to hike rates.
“Generally what insurers have been saying is absolutely spot on” over the last 12 to 18 months, Collings said.
This sentiment was echoed on during a BIBA conference panel on market conditions. Carl Evans, group chief executive of professional risks at broker Griffiths & Armour, said that while prices had gone up significantly, they were still only at a long-term average.
“There’s no element of profiteering or profit-chasing in my own experience,” he said.
While continuing price rises amid a general rise in all costs could prompt policyholders to cut back on insurance coverage, some in the industry are optimistic that insurance spend will not be cut back heavily.
“I think what we’ll see is consumers maybe making different decisions around how they plan their budget[s] rather than cutting the insurance premium,” Seán Kemple, managing director of Close Brothers Premium Finance, said in an interview at the conference. Though there is a bit of “cautious nervousness in the air,” most brokers are still talking about growth, he said.
Once a discretionary purchase, cyber insurance has become a must-have for many businesses, including small and medium-sized enterprises despite rising prices and reduced availability of this type of cover.
Kearvell said that this is being driven in part by larger companies asking whether the SMEs that supply them have cyber insurance and are undertaking cyberrisk management as part of the tender process. Smaller businesses themselves are also increasingly being caught up in cyberattacks, Kearvell noted.
Policyholders may be able to take the sting out of property price increases by ensuring they have captured the inflation in asset values. While getting asset valuations right is a simple fix in theory, in practice it is more difficult because “there is a cost attached to that at a time when everyone is squeezed,” Collings said.
Calculating correct asset values and avoiding underinsurance is important for both policyholders and the image of the insurance industry. Adjusting down payments for legitimate claims is “the last thing the insurance market wants to be doing,” Collings said.
“Reputationally and just morally, the market is trying to do the right thing,” Collings said. “It is very hard to do that if they have not got the premium that was due for the risk.”