Asset and BI values require review in light of inflation
Insured values and policy wordings should be reviewed to confirm insurance programmes remain adequate, according to Marsh.
The annual inflation rate in the UK reached 9.1% with the Bank of England warning it could hit 11% within months. In construction, however, the cost of rebuilding or repairing property following a loss has increased significantly since 2015, with sharp rises since 2020.
Accounting for this type of inflation in insurance renewals is crucial for businesses to ensure they are not underinsured. Marsh stated in its Inflation Insight white paper, released on 23 June: “Underinsurance may impede business recovery by capping claims payments below the actual value of lost assets. Furthermore, stipulations in policy terms could mean additional implications if underinsurance occurs.”
Businesses risk not having full indemnity if the value of an insured asset increases, but the relevant loss limits are not appropriately increased.
“In the event of underinsurance, the insurer will proportionately reduce the amount that they are obliged to pay based on the difference between the insured value and the actual value of the lost asset.
“Most insurer wordings will include at least one average provision. These clauses allow insurers to proportionally reduce a claim.”
On business interruption, most policies have a maximum indemnity period usually set at 12, 18, 24, 30 or 36 months. This means that delays to the property being reinstated after a loss stretching beyond the indemnity period can result in additional uninsured costs and loss of revenue.
Marsh warns that a 12 month indemnity period “may not be adequate in this environment”.
“Given global labour and supplies shortages, delays in shipments, and the potential for protracted construction projects, the length of business interruption indemnity periods should be reviewed and, if necessary, extended,” the broker added.
Businesses concerned about the impact of inflation on the values of their assets should consider having valuations updated, modifying declared values ahead of the next renewal and, where necessary, increasing programme limits in their property and business interruption policies.