4 top tips to prevent underinsurance

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.

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%.

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.