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What does a ‘hard’ insurance market mean to us?

The hard market in insurance is undoubtedly leading to higher premiums and a tougher stance on claims. This is not a good time to be underinsured, as policyholders may suffer a shortfall in pay-out on an otherwise valid claim at a time they can least afford it.

Martyn Barrett BSc MRICS ACII FCILA FUEDI-ELAE, Director, Barrett Corp & Harrington

The majority of well- known insurers in the UK are multi-national, composite businesses with hugely diverse operations. Most offer cover for property, motor, health, liability, engineering etc as well as owning their own property portfolios. Putting it very simply, they make their living by balancing their assets and liabilities in the process delivering profits for shareholders, whilst paying claims.

Insurers are having a tough time, like most businesses and individuals, as we emerge into a post pandemic world. The insurance market was already under pressure pre Covid 19. Many factors were aligning over a period, all of which were squeezing margins and forcing the large composites to become ‘harder’ rather than face losses.

Insurance is often considered a grudge purchase for householders and businesses alike. This can, in part, be because the cost tends to rise and these days you don’t even get a piece of paper in return! Premiums are often a significant budget aspect but, statistically it is unlikely that it will ever give a return as most people don’t ever have to make a claim. BUT, if a big claim does come along, insurance could be the best investment ever made by any of us.

In short, we can’t live without the ‘peace of mind’ that a good insurance policy brings.

As illustrated below, through 2019 and onwards, factors aligned to create an insurance market where capacity was reduced, insurers became more ‘risk averse’ or, choosy in what they offered cover on. Supply began to be outstripped by demand. Insurers found that the cost of their own reinsurance was increasing, and this combined with many other factors led to premiums increasing, cost cutting in insurance companies and other action to ensure that insurers remained profitable whilst still meeting their commitments to policyholders.

Venn Diagram showing the causes that has resulted in a hard insurance market.

Along with a rise in almost all premiums, we also began to see our property insurance premiums increase. Behind the scenes brokers, were working hard to get the best deals from a market in which capacity was shrinking, particularly where the construction was deemed ‘riskier’ or non- standard. Reduction in capacity and resultant increases in premium, have been felt throughout.

There is another aspect of the hardening market that is emerging in insurer’s attitude to claims.

Contrary to the many urban myths, Insurers do pay claims. They contract with us to pay in the event of certain events happening- no ifs no buts- they pay. However, the whole principle of insurance is the benefit of the policy will be paid assuming you have paid the appropriate premium to reflect the risk that the insurer thought they were insuring. Here is not the place to discuss fair presentation of risk and the Insurance Act, but suffice to say that in most policies there is a direct correlation between the value declared at the time we take out the policy (and at subsequent renewals) and the premium paid. Should it be found at the time of claim that the rebuilding cost stated in the policy is inadequate then most policies have a contractual clause which allows the claim to be reduced in the same proportion that the true rebuild cost bears to the value stated in the policy. It’s called Average or proportionate settlement.

Insurers have always had the option to utilise these clauses, but historically, being keen to pay claims to maintain a good profile in a softer market, they have not enacted them. In the experience of BCH Director, Martyn Barrett, who began his Insurance career in loss adjusting, insurers seemed to accept a degree of what they called ‘claims leakage’. Underinsurance has always been out there, our own statistics at BCH after 15 years of trading still show staggeringly high levels

Underinsured properties

It may have taken the arrival of the hard market for insurers to start looking at the whole underinsurance issue more closely. BCH is now being called in regularly after a loss to check whether the insurance value was correct. This can only mean that the insurer is looking to use this to adjust the amount of claim, by applying Average or a proportionate settlement. That is very tough as the reduction in claim value will massively dwarf the amount of premium saved by not insuring for the correct value at the time the policy was taken out.

However, many insurers and brokers are also now part of a drive to educate policyholders on the importance of getting insurance values correct from the start so that problems do not occur at the time of claim. BCH is part of many of those initiatives and offers traditional RICS Compliant site-based reinstatement cost assessments (RCAs) and our market-leading, desk-based e-valuation service, Benchmark, which is increasingly being accepted by the major insurers and brokers as suitable for setting insurance values.

The hard market in insurance is undoubtedly leading to higher premiums and a tougher stance on claims. the growing volatility of construction costs throughout 2021 is likely to impact RCAs for some time, a topic worthy of its own article. This is not a good time to be underinsured, as policyholders may suffer a shortfall in pay-out on an otherwise valid claim at a time they can least afford it.

Remember that the insurance premium we all begrudgingly pay every year could end up the best investment we ever made.

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Property insurance valuations and the underinsurance issue

In the majority of commercial or non-standard property insurance policies, the declared value (building sum insured or rebuild value) is critical to set the correct level of insurance cover.

An incorrect declared value could result in over-insurance – over payment of premium by the insured or worse still, underinsurance – resulting in a major financial loss to the insured in the event of a valid claim.

Underinsurance will only become apparent at the time when the policy is required to react, having a detrimental effect on the property owner and insurer partners.

How much of an issue is underinsurance?

According to our data, which includes over 55,000 property assessments, 80% of properties (non-standard, commercial or flats) are underinsured by up to 55%, on average.

To put this into context, if a property had £200,000 worth of damage on a building which is insured for £825,000, but should in fact be insured for £1,500,000, the insurers may only be liable for 55% of the £200,000 damage.

Therefore, the property owner would only be entitled to £110,000. This is despite the fact, that they are well within the £825,000 sum insured.

Underinsured properties

How could underinsurance affect a property owner?

Not having the right insurance coverage could be devastating for property owners to recover from financially.

If the property is used for commercial activities or for residential lettings, the financial impact could affect livelihoods too – putting business owners into bankruptcy.

Setting the rebuild value

Responsibility falls with the property owner or freeholding entity to ensure that the rebuild value of the property on the insurance policy is correct.

For non-standard, commercial buildings or blocks of flats, this is not a straightforward task – requiring specialist surveying knowledge and expertise.

Yet often, the rebuild value is estimated, or average price data such as the BCIS calculator, is used. It’s difficult to define what ‘average’ is when there are so many variables from one property to another and even more so with older properties, small holdings, blocks of flats and commercial buildings – ‘average’ is not reliable enough.

What happens when there’s a claim?

When a claim is made, a Loss Adjuster will assess whether the property was accurately insured.

If it is underinsured, depending on the policy wording, there may be a ‘Condition of Average Clause’ whereby the amount of claim is reduced proportionally to the value of underinsurance.

It is also possible that the insurer may be entitled to avoid i.e. not pay the claim, if it materialises that the risk was unfairly presented.

How to prevent underinsurance

The simplest way to prevent underinsurance is to instruct a RICS compliant Reinstatement Cost Assessment (RCA) from a reputable company.

An RCA is a site-based buildings assessment carried out by an experienced Buildings Insurance Surveyor.

The RCA can be tailored to a specific insurance policy and takes into consideration every aspect of a property from the boundaries and driveway to the fixtures and fittings.

 

Benefits of a Reinstatement Cost Assessment

When should a Reinstatement Cost Assessment be carried out?

If any of the below criteria are met, we would recommend an RCA is carried out:

  1. Building is listed
  2. Building(s) are made of stone
  3. Property is difficult to reach
  4. Building is eco-friendly
  5. Property was constructed before WWII
  6. Building has been recently altered
  7. Use of the building(s) has changed
  8. It’s more than 10 years since the building had a professional building insurance valuation
  9. Extensive external features such as outbuildings
  10. Updated with expensive fixtures and fittings

How to instruct an RCA

BCH are the chosen provider of RCAs to policyholders of major insurers and brokerages.

You can call us on 01455 293510, email info@bch.uk.com or contact us here to arrange an RCA for a property.

If you are a broker, insurer or managing agent, you may benefit from our Portal which through a log-in, enables you to request, manage and track the status of multiple RCAs for your customers – ask us for more information!

Underinsurance: Protect Your Livelihood

“If underinsurance is discovered, then it is likely that the claim pay-out will be reduced”
How does underinsurance occur?

How does underinsurance occur?

When a building insurance policy is taken out, the property owner is asked to provide the ‘building sum insured’ or rebuild cost. If this is not accurate and is lower than the actual cost to rebuild the property, the policyholder will be underinsured.

Most insurance policies require the owner of a property to state the correct value for rebuilding it, at the time of completing an insurance proposal.

The rebuild value forms part of the contract for insurance. The policy premium calculated by the insurer, is largely based on this figure at the outset and at subsequent renewals.

The Importance of Correct Insurance Values

If the rebuilding cost stated in the policy is found to be adequate at the time of claim and the claim is covered by the policy, it will be paid in full.

However, if underinsurance is discovered, then it is likely that the claim pay-out will be reduced, potentially proportionately.

With a large loss, the financial impact could be catastrophic to the Insured, leaving them unable to fully fund the rebuilding of the property, from the proceeds of reduced payment under the policy.

To put this into context, in 2020, BCH surveyed 1600 commercial and residential properties and found that 80% of them were underinsured.

If any of these properties suffered significant damage, the property owners would have been faced with a huge financial loss.

Typically, the more complex and unique the property, the tougher it is to estimate the rebuild value and what may have been the correct figure 10 years ago, is unlikely to be the case now.

How A Reinstatement Cost Assessment can help

Arranging a Reinstatement Cost Assessment (RCA) for your property will remove the guesswork and ensure you have an up-to-date building insurance valuation for your policy.

Most property owners have an idea of the market value of their buildings. However, rebuilding costs for insurance purposes are very different.

An RCA undertaken by a professional Building Insurance Surveyor will take into account the cost of rebuilding the main property itself and also the other structures and features which combined, make up the insurance policy definition of ‘buildings’.

This usually includes outbuildings and permanent external features, along with demolition and debris removal, professional fees and VAT where appropriate.

In the case of a suburban block of flats, external features may include costly extensive retaining walls – defining a parking area with lighting and security gates.

A historic or listed building, for example may have items, such as York stone paving, brick garden walls or a range of outhouses, which may not have been taken into consideration.

At BCH, we find that most property is underinsured. Having an RCA takes the speculation out of setting insurance rebuild values and gives a policyholder ‘peace of mind’ that when a valid claim is made, the insurance policy pay-out will be in full and not be reduced because of the discovery of underinsurance.

The worst time to discover underinsurance is at the time of a claim. The best time to act is when you are reviewing your insurance arrangements.

Whether you are a property owner, manager, insurer or broker, if you would like to determine the precise rebuild value of a property, please contact us on 01455 293510 or email info@bch.uk.com.

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