Is your business at risk of being underinsured?

The last couple of years have brought new challenges to almost every business. We’ve had to adapt to new working practices and all the many obstacles that Covid threw in the way of what we knew as “normal”.

Whilst time has been spent working towards a new normal, focus has perhaps moved away from areas such as insurance. It’s been much easier to tick a box and renew existing policies than to have to spend the time reviewing both the cover provided – and the provider.

However, data from Aviva paints a worrying picture in the post-Covid world:

1 in 4 SMEs have not reported a material change to their policy in the last four years.[1]
Only 20% of SMEs have had their insurance policies updated to reflect their changing business models.[2]
The risk is particularly high in the construction and industrial sectors.

One of the biggest areas of underinsurance is property being insured for less than it would cost to rebuild – and the implications can be extremely costly.

According to Rebuild Cost Assessment:

80% of UK properties are underinsured [3]
The estimated underinsurance total for all UK commercial properties is £340billion.[4]

RebuildCostASSESSMENT.com appraises more than 2,000 commercial properties every year, from shops and hotels to offices and factories. Their data shows that more than 84% are either over or underinsured.

If your commercial property is not insured for the amount it would cost to rebuild, you could either be paying too much for cover you don’t need – or suffer the more severe financial consequences if a claim is made and your property is found to be underinsured.

Being underinsured is more common than you might think

Many property owners insure their building for the market value. But the value that matters for insurance is the rebuild cost, i.e. what it would cost to completely rebuild your property should the worst happen.

When it comes to claims, many insurance providers use some called an “Average Clause”. Here’s and example of how it works:

Your property is insured for £1million, but the actual cost to rebuild is calculated at £2million. This means that if a property insurance claim is made it could be reduced by 50%. If a fire were to completely destroy the building, you’d be left with a £1million shortfall to rebuild your business.

This handy video explains the Average Clause in more detail.

Around two thirds of commercial properties are under insured and normally covered for just two thirds of their correct rebuild cost. Can you afford to be one of these statistics?

Why is the rebuild cost different to the market value?

Rebuild costs have increased significantly over the last couple of years – thanks to issues such as inflation, supply chain shortages and increased demand for certain materials. According to the Builders Merchants Federation (BMF), prices have risen by between 10% and 15% for products and materials this year. However, some products, such as timber, have seen prices go up by 50% and by as much as 100% for oriented strand board (OSB) and other sheet materials, which are all key housebuilding components

The main factors at play here are pent up demand following Covid lockdowns and the re-starting of postponed building projects, as well as the impact of Brexit on imports from the EU. The loss of around 1.5 million foreign workers throughout 2020 and 2021, many from construction, together with increased demand in other countries for construction materials, such as high Chinese demand for steel and extended lead times for virtually all materials, have combined to create a perfect storm around rebuilding costs.

Will Molland, MCIOB AssocRICS, Director at RebuildCostASESSMENT.com

How to make sure your business is protected

Understanding the risks you’re exposed to is key to making the right decisions with your insurance arrangements.

What’s changed in your business since last year’s insurance renewal – or since the last time you had a proper renewal discussion with your insurance adviser?

Do you know if the cover you have right now is right for your business today?

When it comes to making sure your property is insured correctly, you need a trusted expert to complete a professional assessment – which can be both time-consuming and expensive.

We have partnered with RebuildCostASSESSMENT.com to provide you with a reliable low-cost service from a ‘Regulated by RICS’ (Royal Institution of Chartered Surveyors) organisation.

You’ll receive a comprehensive Rebuild Cost Assessment (RCA) report guiding you on how much you should insure your property for. It is a fantastic and affordable online service which can protect you and your business from the potentially severe consequences of underinsurance.

Talk to us to find out more.

[1] Based on Aviva held SME business, excluding Fleet – Modelling 80% of the account and extrapolating the total, correct as of November 2021.

[2] Research from Aviva’s Risk Insight Report 2021. The Report was commissioned by YouGov to conduct research amongst UK business leaders

[3] Data derived from 14,713 Rebuild Cost Assessments completed between Sep ‘20 and Aug ‘21.

[4] Estimate based on British Property Federation (BPF) data on UK commercial real estate

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