Underinsurance is an increasingly serious issue for Kiwi businesses and asset owners, and lack of adequate cover can result in massive and unaffordable losses.
According to a recent UN report, low insurance coverage has persisted across the Asia Pacific region despite suffering almost $1.3 trillion in losses over the last 50 years. This has resulted in businesses and individuals left to bear the massive costs of calamities, with many businesses finding previous trading levels unsustainable following major disasters.
According to Crombie Lockwood’s executive broker and technical manager Greg Powell, building and business interruption are currently the largest areas of underinsurance, and unseen pitfalls often result in gaps in coverage. Speaking to Insurance Business, Powell says there are many details that policyholders often overlook.
“Brokers need to be talking to their clients about whether they’ve updated their insurance valuation,” says Powell. “Research done some time ago showed that a massive amount of people with building insurance were underinsured, and that is certainly still relevant today. Clients will often be reluctant to do it every year, but we say it should be done every two years at the very least, or else you risk being significantly underinsured.”
Valuation updates are important, since sums insured will change year on year, and policyholders should be mindful of not getting caught out by the changes.
“Say, for example, you had a million-dollar building,” Powell says. “If your sum insured went up by 5%, that already amounts to fifty thousand dollars. Not many building owners could afford to pay that sum of money, and if you let that go over the course of several years, it will only accumulate.”
Business interruption is the other key area suffering from underinsurance, and coming up with a plan tailored to the size of a business will prove crucial if an interruptive event does occur.
“We spend a lot of time talking to our customers about their cost of sales,” says Powell. “We don’t just ask for gross profit, because small business owners inevitably turn a profit that is too low from a business interruption perspective. But they need to cover all their fixed costs – employment of staff, plus any other overheads that may continue – and unless they calculate that number correctly, they can once again find themselves significantly underinsured.”
According to Powell, indemnity periods are also a key thing to watch out for. A 12-month indemnity period is standard, but a minimum of 24 months should be recommended given the likelihood of natural disasters, and the time it takes to rebuild a business.
“They found in Christchurch that 12 months simply went in a flash,” says Powell. “Business owners still hadn’t repaired their buildings, they couldn’t find contractors, and there was no way that they could go back to their level of trading prior to the business interruption. From Crombie Lockwood’s perspective, our aspiration is that we will always try to understand our client’s business and give them the right advice to ensure they will financially survive an insurable event.”