Underinsurance - a growing risk for consumers and businesses

The risk of underinsurance for consumers and businesses has grown greatly arising from inflation and other global factors and means that in the event of a claim both can be exposed to having to foot substantial costs where the sum insured is not sufficient to cover losses, Brokers Ireland has stated.

The Brokers Ireland Future Frontiers conference heard of the key areas where people have the greatest exposures. For businesses this tends to be in areas where raw materials, machinery and equipment are sourced from abroad with some sectors being more exposed than others; in areas where businesses may be carrying more stock than when an insurance policy was taken out or where buildings have not had a professional valuation within the last three years.

In relation to consumers, risks of underinsurance on homes are typically being incurred where the insured value of the property is based on a developer’s cost and has not been updated or where costs for outbuildings, driveways, gates, fences, paving or lighting have not been included.

In the area of motor, underinsurance is arising as a result of the rising costs of vehicle repairs due to advancements in technology in vehicles; increases in the cost of parts and materials.

The conference also heard that in 2023 it is possible that the EU will ban local garages using cheaper, aftermarket parts that aren’t endorsed or sold through the vehicle manufacturer, so that, should it happen, it will worsen the situation into the future.

Diarmuid Kelly, Chief Executive of Brokers Ireland said the key message is one has to be constantly vigilant to make sure insurance cover is updated to take account of the full cost of exposures.

“A recent review by Central Bank found that underinsurance in the home insurance market had increased from 6.5pc in 2017 up to 16.5pc in 2021.

“But the issue has deteriorated since last year. The review also found that for those who had their claims reduced due to underinsurance, the average reduction in the claim payment was approximately 19pc in 2021.

“Costs have soared this year particularly with the Russian invasion of Ukraine. Anyone who has not reviewed their insurance cover would be well advised to do so and keep a close eye on it on an ongoing basis,” Mr Kelly said.

Some of the exposures could be substantial enough to put people out of business or to mire people in debt at a time when they are already struggling with other cost of living increases, he added.

Most insurers do have an index-linking clause in their home insurance policies, which would cushion the blow from some of the effects of inflation.

“It means that if there’s a change in the rebuild cost the amount insured will automatically increase by the percentage provided for in the policy. However, for index linking to work effectively the rebuild value must be correct at the start of the policy.

“But given the rapid escalation in rebuild costs index-linking rates may not be sufficient to counter the effects of the significant inflation we’re seeing in the construction sector.

“If you have a doubt about any element of your home insurance, or if you feel you may be at risk from underinsurance, you can always consult a broker, but do it before you need to make a claim,” he said.


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