A comprehensive guide to avoiding underinsurance

This guide looks at underinsurance from both an individual and organisational perspective, what causes it, what we're seeing in the market at the moment, and the impact it can have across the UK.

Insurance is an essential personal and business component, transferring risk and providing much-needed financial security.

However, for insurance to fulfil its objectives, the cover policyholders purchase needs to accurately reflect their personal and business requirements. Insuring assets for incorrect values, or setting cover limits too low, is likely to result in underinsurance.

Underinsurance can lead to policies not operating as intended, delivering less indemnity than needed following a loss, and jeopardising a policyholder’s ability to recover.

One particular cause of underinsurance is inflation, which as seen in 2022 can have huge impacts. Inflation in the supply chain (the process of materials getting from source to consumer) can cause a ripple effect on prices, causing costs to rise, which in turn causes more inflation and increased prices. For example if the cost of materials increases to a construction company or to a retailer, they will in turn raise the prices they charge the end customer. Other supply chain issues, such as the lack of raw building materials and shortage of available labour, can also cause prices to rise as demand overwhelms supply. Both organisations and individuals are feeling the effects of these increasing costs at a time of economic hardship.

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