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Blog: Inflation and underinsurance – the silent assassins of claims

Skyrocketing cost of materials in the construction industry is having devastating consequences for reinstatement claims, says Lee Goodwin of Oakleafe Claims Loss Assessors

It’s no secret that the UK the economy is under inflationary pressure, driving up prices in many industries, but in the construction sector, runaway inflation is having a particularly strong and insidious effect.

The rising cost of property damage claims for incidents such as fires and floods leaves home insurance policyholders with a silent and deadly problem.

The Office for National Statistics reports that the consumer price index (CPI) rose 10.1% in the 12-month period to July 2022, but according to the Federation of Master Builders’ State of Trade Survey, builders have seen material prices rise by up to by 25% and labor costs by 30% over the same period – nearly three times the national average.

A shortage of skilled labor and availability of equipment creates havoc in the reinstatement industry and has a negative effect on policyholders and their claims settlements.

If you apply the current inflation rates seen in the construction industry to the property damage sections of a policy, that leaves sums insured significantly lower than they should be, even if they were reasonably accurate a while ago. 12 months at the start.

By working with brokers and handling thousands of real estate claims each year, we see firsthand that many homeowners in the UK are underinsured without realizing it. According to the insurance broker macbethsome 80% of UK properties are underinsured. It’s four out of five. On average in the UK buildings are only insured for 68% of the amount they should be.

Underinsurance may provide policyholders with a slightly cheaper premium each year, but it does not adequately cover them for the value they need, and they will be responsible for the shortfall, not the insurer.

The industry has a moral obligation to do more to educate policyholders about the problem and offer them the opportunity to increase their level of cover in the medium term and not just at policy renewal. It is easy to communicate the problem to them given the media available.

Ultimately, this is an opportunity to increase revenue. An increase in coverage usually means an increase in premium for brokers and their principals, so it’s a win-win for both parties.

According to the Association of British Insurers, £226bn of active policies could face underinsurance issues in the event of a claim. Policyholders generally do not understand the full implications of being underinsured, which may mean they are more likely to blame brokers if their settlement value is reduced.

One way to avoid this is for brokers to obtain accurate reconstruction sums from a loss assessment firm accredited by the Royal Institution of Chartered Surveyors with qualified in-house surveyors. This value-at-risk service allows brokers to ensure that the sums insured by policyholders are accurate and minimizes the risk of resulting claims settlement “assassination”.