4 top tips to prevent underinsurance | Risk info please do not approve | Large | Business | Zurich Insurance

4 top tips to prevent underinsurance

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With customers typically responsible for specifying their own sums insured, problems are possible to occur.

  • Underinsurance is a persistent problem for the industry, and customers can often feel powerless to combat it

  • It can result in inadequate claims settlement, dissatisfaction and possible litigation

  • Zurich offers four top tips to remove underinsurance from your book of business

1. Educate yourself on the total cost of risk

Only by understanding the Total Cost of Risk (TCOR) can businesses make informed decisions about how to manage the exposures they face and avoid underinsurance.

However, there are still misconceptions about TCOR, and most people assume it refers to insurance premiums alone, but by recognising all of the costs, you can implement strategies to reduce them.

TCOR is calculated using a business’s insurance premiums, direct costs, indirect costs and risk management expenses.

By learning about TCOR, you can understand the crucial role it plays in allowing decisions to be made about the trade-off between self-insurance, insurance and risk management investment.

2. Encourage regular valuations

Knowing the theory behind each calculation is one thing, but there are several factors that can affect property valuations, business interruption calculations and the adequacy of indemnity periods.

Buildings, for example, are subject to a constantly changing landscape that can affect their valuation. Availability of materials, fluctuating labour costs, and planning regulations stipulating a lower environmental impact, all have the potential to significantly change a final reinstatement cost.

Regular professional valuations are the best way to ensure adequate sums insured. The cost of engaging a valuation specialist will be minimal compared to the potential shortfall in claims settlement, should a customer suffer a major loss for which they were underinsured.

3. Pay attention to business interruption

Business interruption (BI) is a particular problem area for underinsurance. In particular, there is widespread confusion among customers over insurable gross profit, and how it differs from an accountant's gross profit calculation.

Indemnity periods are also commonly found to be inadequate, which can mean claims payments cease before a customer has had a chance to recover. Ross MacPherson, Director at QuestGates, one of Zurich’s partner loss adjusters, explains: “Customers regularly choose a 12-month maximum indemnity period, believing this to be adequate, but in reality it is not.

“For example, there could be planning issues, or difficulties in procuring machinery and plant, all of which can mean a business may not recover as quickly as anticipated.”

According to the Chartered Institute of Loss Adjusters, 37-52% of BI policies are underinsured with an average shortfall of 45-63%.

4. Help with business continuity planning

While insurance can indemnify customers for any losses incurred, an effective business continuity plan can make a great difference to the size of those losses, not to mention a customer’s ability to continue trading and make a full recovery.

Planning for major loss scenarios can also help prevent underinsurance. By having plans in place to minimise loss and recover more quickly, customers can reduce the risk of exceeding sums insured and indemnity periods. 

For more information on how Zurich can help protect you and your clients with these issues, speak to your local Zurich contact.