Inflation and war in Ukraine increase companies' risk of being underinsured
Recent increases in the price of raw materials and critical components are a result of shortages in supply. As inflation continues to grow and the war in Ukraine moves into its fourth month, companies that are underinsured are facing serious risks as, for example, major claims are increasingly expensive when compared to a year ago.
Heavy reliance on suppliers
The scarcity of materials and components can create a serious dependency on certain suppliers, which is an increasing issue that challenges many clients.
“The importance of having multiple suppliers for critical equipment cannot be emphasised enough. The strong dependency on single suppliers puts forward a significant risk of facing long periods of business interruption, as many companies cannot get the needed goods from their usual suppliers,” says Kristine B. Wagner, Head of Underwriting at If Industrial.
“One of the most essential questions to consider as a company these days is; if something happens, how much longer will it take for us to be up and running again - and to also have a plan for this. Our aim is to help our clients in having the insurance they want, whether it is a 100% coverage of their business interruption or solely cover for e.g. the first 6 month. It must be a conscious decision from the client side and a financial exposure the top management are willing to take,” she says.
A common problem
Price increases for raw materials and the shortage of materials and components means that claims in general today are increasingly more expensive compared to a year ago. In If Insurance, we have experience with corporate customers who have been significantly underinsured as inflation has raised costs to cover claims.
“Being underinsured is a bigger problem than most people are aware of. Worst-case scenario is that the insurance solution may be insufficient to cover the damages incurred. This means that rebuilding or purchasing new equipment, so that operations can be maintained, may not be possible at all,” Kristine B. Wagner says.
We are in close dialogue with many large clients in the Nordics, to review the client companies' values and discuss whether the insurance solutions correspond to current conditions in today’s market.
In cases where the insurance sum is too low, companies are at risk of not being able to secure the necessary compensation to recover from a fire or flood or other property damages. Thereby, the outcome of being underinsured can, in the worst case, stop the company from re-establishing operations completely.
In general, the current situation has developed over time, further affected by the corona pandemic. This troubling development, specifically the number of companies that are underinsured, has increased during second half of 2021 and this trend is accelerating due to the war in Ukraine.
"We have not seen inflation at this extent for 20-25 years. The situation is completely different this year than just a year ago,” adds Kristine B. Wagner.
One of the most important tasks
"We see this as one of the most important tasks right now. We are committed to ensure that the values our customers are insuring are adjusted to the current price level. Our experience is that almost all companies underestimate the expense to re-establish the company's operations after an accident or incident. The consequences may be that the company cannot get full coverage and is unable to recover and re-establish their operations", Kristine B. Wagner says.
We review the insurance solutions of companies of a certain size on several parameters, such as stock values, longer delivery times and the prices for acquisitioning needed materials and equipment to maintain production.
“Even in cases where the value of the buildings can be assessed relatively easily, we see that it is difficult to calculate the total values accurately. Challenges with, for example, obtaining the components needed to keep production up and running when it comes to critical equipment, or the scarcity of materials and trade restrictions make it more difficult than usual,” says Kristine B. Wagner.
“It is important that clients act on this, otherwise they risk being significantly underinsured. Our aim is that our customers are not disappointed when damage occurs. And you will be disappointed if you are underinsured,” she says.
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