The importance of accurate values in an insurance policy remains especially relevant as we see risks relating to underinsurance continue to surface, impacting businesses and hindering their recovery when incidents occur.
The British idiom ‘penny-wise and pound-foolish’ rings true in most cases of underinsurance. Underinsurance occurs when the amount listed in an insurance policy does not correspond to the actual value of the conditions covered. If the insured sum is too low, the compensation needed to restore operations after a fire, flood or other extensive damage simply will not be enough. In these cases, without accurate insured values, the gap to rebuild can reach tens or even hundreds of thousands, leaving the company to take the shortfall out of its own balance sheet.
According to Johanna Mola, Nordic Head of Property Underwriting at If, being underinsured is a larger issue than most people realise. “The consequence, in a worst-case scenario, is that a company’s insurance policy might be insufficient to cover the damages incurred. This means that recovering while maintaining operations after a loss will simply be impossible.”
Following the COVID-19 pandemic, and rising geopolitical conflicts, scarcity of materials and components have created new dependencies on specific suppliers. “This growing issue challenges many companies—and having multiple suppliers for critical equipment cannot be emphasised enough,” Mola states. “Relying heavily on a single supplier poses a significant risk of long periods of business interruptions, as many companies struggle to secure the goods they need from their usual suppliers.”
There have been cases, where assessing the value seem straightforward at first. In reality, however, it can be difficult to calculate the total values accurately. Securing the materials or components required to keep production going, replacing damaged equipment, and sourcing sufficient construction materials to rebuild must be factored into the insured value. These variables must be carefully considered before an accident or incident occurs to avoid being significantly underinsured.
As Mola highlights, “We expect to see even fewer leeway clauses going forward. Year after year, we see a growing number of underinsurance cases.” She continues, “Maintaining accurate insured values is the best way to ensure your recovery. Having accurate sums insured provide additional security to a company, protecting their operations and supporting recovery when something happens.”
Underinsurance truly exemplifies the idiom, ‘save a penny, lose a dollar’ or ‘penny-wise, pound foolish.’
Understanding the correct values of raw materials, equipment and recovery is vital. The true costs relating to replacing business critical equipment, including for example the rebuilding of damaged electrical installations or systems is increasingly important. As an example, securing a new transformer today has become a daunting task. Over the past year, the shortage of electrical distribution transformers has impacted business operations and construction projects globally.
Mola emphasises the importance of robust business continuity plans. “Companies need to consider, if something happens, how long will it take for us to be up and running again?” She adds, “At If, our goal is to help clients get the protection they need, whether it is 100% coverage for business interruption or only covering the first 6 months. This must be a conscious decision on the client’s part, with clear understanding of the financial risks the company’s top management is willing to accept.”
Using an external appraisal company can help clients secure the most accurate valuation of their assets. In the Nordic market, this practice is less common, partly due to industrial companies not being required to review their property and assets regularly—a practise more typical in other European countries.
To keep insured values up to date, external appraisals for different sites and properties should be conducted every 4 to 6 years. Mola explains, “It’s also important on the proper indexation to ensure values remain as accurate as possible over time. Generally, the best valuations often come from full site visits by external appraisers, who can inspect everything on the ground. Having people physically inspect the site increases the chances of getting the values right.”
Mola concludes with a reminder: “By working closely with our clients, we can best secure their business continuity. Managing risks and having accurate values puts us in the best position to support our clients when they need it most. Our goal is for clients not to be disappointed when damages occur—but they will be with inadequate coverage. In the end, insurers can only cover the amount insured.”
Head of Property Underwriting