Rebuilding cost inflation adds to underinsurance risk
The fastest increase in construction costs in over a decade coupled with Covid-induced delays and interventions could lead businesses increasingly exposed to the risk of underinsurance.
Earlier this month (April 2021), Costmodelling.com updated its Tender Price & Building Cost Indices. It forecast building costs to rise by 2.7% in the next 12 months.
In February Construction News also noted how the sector was experiencing increases in both materials and labour costs.
One analyst, Chris Bond at DRS Bond Management, pointed to steel prices having risen by over 50% with a loss of migrant workers adding to wage inflation.
In March Tim Moore, economics director at Markit IHS noted that the buoyancy of the construction sector meant an "imbalance of demand and supply [had] contributed to the fastest increase in purchasing costs across the construction sector since August 2008."
How do rising construction costs impact my insurance?
Building cost inflation matters because, unless the cost of rebuilding your property is regularly and accurately assessed, you can risk being underinsured.
It's important to remember that we're not talking about the market value of your commercial premises or home, but how much it would cost to fully reinstate it.
If the cover you have taken out does not fully reflect that cost then you could be left out of pocket should you need claim on your commercial property insurance.
For example, if the cost to rebuild an insured property is £100,000 but is only insured for £65,000, then the insurer will settle just 65% of the claim value.
That logic is easy to understand and hard to refute.
If the level of underinsurance is particularly severe, an insurer might also argue that the policyholder has misrepresented the risk. This can lead to a policy being cancelled, full stop.
Unwittingly underinsured
However, many businesses and property owners are unwittingly under-insured.
Specialist valuer RebuildCostASSESSMENT.com (RCA) reports that nearly 80% of all UK properties are underinsured.
It estimates that, on average, underinsured buildings are covered for just 69% of the amount they should be.
Significant gap
That's a significant gap, one that could leave the insured party liable for more than 30% of the cost of a claim. That figure can translate not just into the thousands, but the tens of thousands or even millions of pounds.
Using data sourced from British Property Federation it calculates that UK commercial property is underinsured to the tune of £325 billion.
The figure for private rented homes, based on housing stock data from estate agent Savills, is an equally eye-watering £315 billion.
Those who fully own high-value residential property can also face significant risks. This is because they may no longer be safeguarded by the full rebuild value insurance protection which is a standard requirement of mortgage lenders.
Preventing building underinsurance
There are a few things owners can do to guard against underinsuring their property assets.
Key among them is securing a professional valuation at least every three years.
Given the immense pressures placed on business by the Covid pandemic, businesses could be forgiven for having failed to keep up with this particular bit of paperwork.
What's more, Government restrictions may have made it harder to arrange for a surveyor to visit and secure a valuation.
Now, though, there is a readily available and highly affordable solution.
Fast, reliable, low cost professional valuations
In conjunction with RCA, who are RICS regulated, RBIG can now offer professional rebuilding valuations at impressively competitive prices - from just £95 (+VAT).
These are prepared through specialised desktop assessments, conducted by highly trained assessors.
They draw upon not just RCA's professional expertise, but a range of databases - including the RICS' Building Cost Information Service - pricing books and specialist cost modelling.Detailed and thorough, they are accepted as accurate assessments of rebuilding costs by insurers.
Suited to both commercial and residential properties, the reports also provide guidance on how long a complete rebuild will take. For obvious reasons, this can be vital if a company is seeking to secure business interruption insurance.
Covid and underinsurance risks
The pandemic may also have increased the risk of underinsurance.
In order to survive - or even thrive - many businesses adapted their operational models.
Restaurateurs and retailers championed delivery and click-collect services.
Online was championed over physical transactions and fresh overseas opportunities opened up.
These kinds of Covid-induced interventions have the potential to impact the value and scope of insurance required.
If a company vehicle is repurposed to handle customer deliveries, is it appropriately covered?
If products are now being sold to new export markets, is this covered by existing liability insurances?
Has new equipment been purchased?
Has the value of stock increased?
All of these factors and more can impact your insurance requirements.
This is why it's important to consider the implications of any changes you make to your business - and always keep your commercial insurance broker or insurer up to speed.
Accessing professional advice
If you'd like more details or to arrange a desktop assessment please call Lee Matwiejew on 07768 272067. Alternatively click here to email.
We would naturally also be happy to discuss how you might mitigate against wider underinsurance risks.
