Is the cost of living crisis leading to an “underinsurance crunch”?

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Crises and crunches. In recent years, it seems that the global economy is continually lurching from one to the next. Two statements in September by influential organisations have served to highlight yet another issue putting pressure on household finances: a potential epidemic of underinsurance.

The recent Society of Chartered Surveyors Ireland (SCSI) House Rebuilding Guide showed that house rebuild costs have risen by over 20% in 2022.1 This follows on from the SCSI’s last rebuild guidance in 2020, which stated that rebuild costs had risen by 7.3% in the previous 18 months.2 Two significant increases in relatively quick succession have put many insureds in a position where reassessing the rebuild value is now an urgent task. Without doing so, they are likely to be underinsured by a considerable margin. 

The Central Bank is sufficiently concerned with how this issue is being managed that they have issued their own whitepaper on the topic of underinsurance.3 It places the responsibility for educating clients firmly with insurers, and therefore, brokers have a role to play too.

The Central Bank’s review found that while brokers and insurers do remind consumers of the need to review their sum insured, they could do more to highlight the practical consequences of under-insuring their home.3

At DUAL, we serve high net worth clients who often have expensive homes with an extensive array of high value contents. On occasion, we have seen situations where a client wishes to save some money on their premium.

Most of our clients are financially literate; many have built successful businesses from the ground up. In doing this, they will have made their fair share of judgement calls and taken calculated risks. Sometimes, their entrepreneurial nature means they wish to negotiate. With household insurance, the first area they review is the sum insured. Their experience or gut feel may lead them to believe that a worst-case home insurance scenario is unlikely to happen, and that a pay-out of the value of a full rebuild will never be necessary.

At DUAL, these conversations usually run quite smoothly. Valuations are an integral part of the way we do business and our policies don’t apply the average clause to claims. Many insurers, however, faced with such negotiations, would need to explain the average clause and the importance of having the correct sums insured. According the Central Bank review, each insurer approaches this differently and some do it better than others.

The worst time to explain what the average clause means is during a claim – and it seems to be happening quite frequently across the Irish market, where more than 1 in 7 claims are underinsured.  

In 2021, nearly 17% of claims were subject to underinsurance; back in 2017, the number of underinsured claims was just 6%.3 With the 2022 increases in rebuild values, unless the situation is handled assiduously, it is reasonable to expect these figures will rise.

Index linking is designed to account for mid-term inflationary price rises, and has proved effective in the past. However, this situation is different. For rebuild costs to rise nearly 30% in just three years is extraordinary.1,2 This scenario is well beyond the remit of index linking, which means accurate valuations are more important than ever before - and in these extraordinary times, a midterm revaluation could save a lot of stress in the long run. 

Managing a potential underinsurance epidemic is all down to how you communicate with clients. Doing it will means explaining things on their terms, not their T&Cs.

At DUAL we are passionate about getting the right outcomes for your clients, and do everything we can to help plan brokers for that from the outset. We believe it is in our remit to protect the clients, and by doing so, play our part in protecting our brokers' ongoing relationships with their clients.