Could higher costs mean your business is under insured?

One of the metrics insurers use to determine a premium for a commercial insurance policy is turnover. Recently we have been having quite intense discussions with clients and insurers to ensure the risk of underinsurance is considered during their renewal.

This is because the economic uncertainty caused by many factors such as rising interest rates, inflation and supply chain shortages is pushing up the price of raw materials and labour costs. The consequence is that the price being paid for products and services has increased – which in turn has inflated the company turnover, but not profits – it is also worth noting that there has been no increase in production as a result of the turnover increase either!

Some of the materials and products that have significantly increased in price over the last 12 months include building materials such as timber, steel and cement. This is pushing up build cost, creating delivery delays which in themselves can lead to financial penalties for missing completion deadlines.

These factors can create a widening gap between accounting valuations of the original purchasing costs, and replacement values.  This particularly applies to companies that buy in advance as the price to replenish stock can be vastly different.

Consequently, the risk of a business being considered as underinsured has increased. This means that should a claim arise there could be a significant gap between the actual value of the loss incurred and the figure insured.

What is under insurance?

Underinsurance occurs when the sum insured on your insurance policy — that is, the amount listed as the maximum an insurance company will pay out if you make a claim — isn’t enough to cover the full cost of rebuilding, repairing or replacing the assets or risks insured.

How to avoid under insurance?

We are advising clients to review their business operations and go back to basics educating employees on safe working practices to minimise risk, particularly in relation to:

  • Business interruption
  • Building damage and asset protection
  • Employee liability and workplace accidents
  • Motor fleet

There is no “one size fits all” approach to determining your insurance needs – regardless of the size of your business.

All companies are different, and so all premiums are different. Every business requires different levels of cover and a discussion with an insurance broker that has knowledge of your sector who can represent your risks accurately to insurers is the best starting point to avoid under insurance.

Conducting a review of your insurance programme, and evaluating your risk profile leads to an insurance programme that is tailored to your exact needs. Consequently, an insurance broker can help reduce the risk of underinsurance and may also help to reduce the cost of your business insurance by presenting your risk profile accurately to insurers which enables them to offer the best deal possible for you.

If you want to be sure your company is adequately insured please get in touch.