Underinsurance

Sofia: Here to speak about under insurance, I'm joined by Chris Andrews, director Risk Management Solutions at Aviva and Mark Briggs, Managing Director Barrett Corp and Harrington. So coming to you, Chris under insurance is not a new issue. Why is it such a high risk right now?

Chris: So you're right, underinsurance isn't new - we've always seen elements of underinsurance. I think what is new is the fallout from Covid, where we've seen the impacts on supply chain, Brexit, further impacting supply chain, but equally impacting the workforce and labour. Uh, and then more recently, obviously, we've seen the war in Ukraine. So three major events having impact on the cost of materials, parts, labour, work force, all bleeding through to then we've got the energy crisis - all of that increases the cost of getting work done. Everything from the construction materials through to bringing people in to actually do the work. Um, and actually, how long it then takes to get done. So in this case, it would be the rebuilding costs, valuations or indeed replacement cost of machinery or parts. But actually also how long it then takes to get that work done.

Sofia: So it's sort of multiple factors all at the same time by the sounds of it?

Chris: Lots of factors impacting each other, all interconnected, then having the impact on inflation. I mean, we saw cost of materials increased back in 2021 and of course, inflation has significantly increased since then.

Mark: I think that's a good way to describe it, Chris. It's almost the perfect storm of anything in construction and now the economy as well, that just brings this issue even more of a problem than it's ever been. And you said it, Sofia at the start, Chris alluded to it. It's always been an issue, but now people are more at risk than they have been before, of kind of drifting into it accidentally if they don't do something about it.

Sofia: So, Mark, how can businesses get it right?

Mark: Yeah, I mean, the key thing really is to have evaluation - that is the bottom line. It's a tricky message to give ultimately, because there's a cost associated with that, certainly at times like now, but really it's getting that basis right, the day one, the declared value at the origin is the important point. We've all talked about index linking and inflation as well. But if the number at the start isn't right, no percentage that you add on annually is really going to help. So the key thing, it's not the market value of the property, it's how much it would cost to rebuild it as far as we're concerned. And that's the important point. If the businesses, the insured, has that information to work with their brokers and insurers, they've got the grounding right at day one and then any reviews thereafter will be looked after, but you can't just leave it on a shelf and forget about it, you've got to look after it, and that's what we need to see happening in today's world: regular updates, regular reviews, making sure you stay on top of it, but have that origin at the start correct.

Sofia: So it's that sort of initial valuation, which is the most important.

Mark: It's certainly the key thing to get yourself on the right path. If you haven't had that in the first place, perhaps you've based your original insurance cover on a market value - they're not actually related. So having that first survey done and then working with your insurers to stay on top of it year on year, and certainly in line with the recommendations in the policy, will just help make sure, in these unusual times, that you're not accidentally falling into it. So get yourself right at the start, then review it regularly and keep on top of it. Don't ignore it.

Chris: Yeah, I think just to sort of add to that point, we would recommend that, a property has its assets regularly reviewed. From our own data, 28% of SMEs, even with inflation where it is today, haven't reviewed their sums insured in the last 12 months. So if you haven't had it done, going back to your point, where's your starting figure, then we urge you to get it done. But equally if you haven't had it done in the last 12 months, now is the time to get that reviewed.

Sofia: Is the frequency, is that something that should be increasing with these factors at play?

Chris: Personally, I believe so. From a risk management perspective, ensuring that you're assets are correctly insured, but equally with the changing times, knowing how long it would take your business if you were to suffer a loss to actually get back into that position prior to a loss. So in this case, rebuilding it or indeed replacing critical machinery, whatever your business needs to make sure it can get back up and running as quickly as possible.

Sofia: And how can brokers work with you, Aviva, to sort of help their clients with underinsurance?

Chris: So I mean brokers, ourselves, you know, we all have a responsibility. I think our responsibility really is to make sure that customers are educated so they understand what needs to be done, why it needs to be done. Ultimately, the responsibility is with the customer to make sure that their assets are correctly valued to make sure that sum insured is therefore correct. But as I said, we need to make sure they have the right tools, the right services and we have our own solutions that we can provide to customers to actually help them, such as working with our specialist partners like BCH, that can actually work with customers and give a truly independent view of what a sum insured should be.

Mark: Yeah, I think that's really important to say, and it goes back to that point of have that survey right in the first place. Chris said it there - it's the insured responsibility to set that number, it's not the brokers, it's not the insurers. Insurers will increase, perhaps for indexation year on year but actually getting that number right at the start is critical, and it's often forgotten about. Some statistics that are out there say that people haven't thought about the cost of inflation on construction, but we all know anecdotally how much it costs to buy some timber if we've done a DIY job, for example. So we all know it's there but applying it to the rebuild of your building that you need to insure is really important, and not forgetting about it, thinking that it won't happen, it does. So have that valuation, talk to the brokers about that regular review, at least look at it every year. I think you said there, should it be looked at more more regularly - RICS guidance and a lot of policy wordings will say it needs to be reviewed at a minimum every three years, properly reviewed every three years with annual indexation in between times. So if you're not doing that now, in times of more steady inflation, arguably less of an issuem still an issue,  but arguably less of an issue - but now you've really got to follow that for that period, possibly have more surveys, but at least be thinking about it every year and following the guidance in those policies.

Sofia: Chris, Mark, that's all we've got time for, thank you so much for joining me today.

Chris/Mark: Thank you very much, thanks for having us.

Sofia: And thank you for watching.

Sofia:  Here to speak about claims inflation and under insurance. I'm joined by Chris Hughes, director of commercial claims at Aviva. Hi Chris. So claims inflation is a hot topic. How is it linked with under insurance?

Chris: So claims Inflation and underinsurance are intrinsically linked, and the impacts are felt as a result of Brexit, Covid-19, the war in the Ukraine and also the cost of living crisis. This is resulting in a shortage of skilled workers, supply chain disruption and increased fuel and energy costs. All this is having an impact not just on the cost of claims, but also how long it takes to settle a claim.

Sofia: Your team must see the very real reality of under insurance. Can you share any examples with us?

Chris: Sadly, we are seeing examples where businesses are coming up short due to underinsurance, and this can be upsetting and difficult for all concerned if the levels of cover aren't correct. Approximately 500,000 SMEs wouldn't survive if they had to pay more than £10,000 in relation to a claim. And we're seeing instance where these are stretching into hundreds of thousands of pounds.

Sofia: And we've seen that the time it takes for a claim to be settled is really important for customers now. If they are underinsured, does this have an effect on the time?

Chris: It can do, and it certainly adds in a layer of complexity But we'd look to review and consider each claim on its individual merits.

Sofia: And how can brokers work with their customers to make sure they avoid underinsurance?

Chris: So it's really a question of brokers working with clients to review their sums insured, but not just for their buildings, but also for their business interruption, with particular reference to the claims inflationary impact that I discussed earlier on.

Sofia: What events are most at risk of claims inflation?

Chris: I think the two that are most at risk are fire and escape of water due to the extent of damage that can be caused as a result of those two perils.

Sofia: Chris, that's we've got time for. Thank you very much for joining me today.

Chris: Thank you.

Sofia: And thank you for watching  

Sofia: Speaking on data and under insurance. I'm joined by Jason Chambers, head of underwriting transformation at Aviva. Hi, Jason. So how can brokers use data to identify and tackle under insurance?

Jason: Aviva has a considerable property address database, and we work extensively with trusted third parties obtaining valuation data. Once we're actually satisfied that the information that relates to the risk address is appropriate, and we do that via post code verification or data visualisation actually showing the broker the actual aerial imagery of the property, we're easily able to identify our property attributes - things like the age of the building or the square footage or the construction type. Once we've got the square footage, it's very easy for us to identify and then produce evaluation or a sum insured. What it then enables us to do is give that information back to the broker, really highlighting how we know the individual specifics of the customer themselves. Aviva is very different in that regard in that we not only identify that there is underinsurance present, but more often not we're able to actually confirm a building sum insured itself.

Sofia: So how can underwriters use data to help brokers and their customers? 

Jason: Our underwriters have access to a range of commercial intelligence tools, virtual assistance in essence. What it means is that we're constantly able, actively and automatically, to be able to identify underinsurance at new business and renewal. We're specifically focusing on vulnerable customers, specifically those customers that have not updated their sums insured for three or four years. Unfortunately, 40% of our customers haven't actually updated their material damage sum insured in that time. What it means, then, is that we're able to give insights directly to the broker at the appropriate time.

We're also able to give information in dashboards and portfolio views, so we can show the broker their entire account and the percentage of underinsurance that they've got, including those customers that haven't actually updated their sums insured in that time frame. What it really means is that we're able to give the brokers key information that's really relevant for them. Aviva is very passionate about giving brokers access to information that's relevant for timely conversations with the customer, and information and personalised information that means that it's directly relevant for the customer.

Sofia: And how can brokers actually use these insights with their customers?

Jason: The issue of underinsurance is well trailed in the insurance industry. Aviva has produced a significant amount of content. I think what's really important now is that we change the dynamic a bit and give information that's very specific to the customer. We know that unfortunately, a lot of the issues around the supply chain and inflation that more and more of our customers are underinsured. We anticipate at least 50% of the customers are underinsured. Um, and some of the increases that we've been seeing are in excess of 40%. So it's vital that we provide as much information to the brokers possible that really shows and highlights the high level of personalisation with our insights. So why is the customer insured? And why is Aviva in a position that we can comment on that regard? So it's highly important that we produce our strong level of credentials information that shows with our address look up service, why we're identifying the customer and why the issue is very relevant to them.

Sofia: What steps should a broker take to deal with under insurance?

Jason: Aviva underwriters have a significant wealth of information at their disposal, from case list at new business or, indeed, information which gives them ideal opportunities to have really great conversations at midterm. We've got the ability to identify cases well in advance of renewal, which gives the broker an ideal opportunity to target those customers that are most vulnerable, particularly those that haven't updated their sums insured on three or four years. We're seeing particular opportunities to identify really vulnerable customers in that regard.

Sofia: Jason that's all we've got time for, thank you so much for joining me today.

Jason: Thank you. And thank you for watching.  

Simon: Hello. I'm Simon Jones, Senior Engineering Underwriter. Today, I'm joined by Nigel Ward,and we are going to be discussing engineering claims and the effects on underwriting. Nigel, what trends are you seeing within engineering claims at the moment?

Nigel: The trends that we're seeing are very much those that are impacting the global economy at the moment.

So supply chain issues for parts is obviously a big driver of cost increases. Looking at the cost of plant itself in terms of whether or not you can actually obtain new or whether or not you're having to look instead at the second-hand market, the costs of which have increased some 20% to 40% over the last reporting period.

We are also looking towards the cost of freight costs. Those have increased around 500% since January 2019. We're also looking at lead times, as I say, for equipment. The demand for projects such as HS2 combined with of course the supply chain issues has meant that costs have increased significantly, lead times have increased significantly for new equipment as well, whereas previously it might have been a year, you're now perhaps looking more towards 18 months, two years, maybe even more in future.

Simon: What's driving all these increases in lead times and costs?

Nigel: The factors are global. The ongoing disruption caused by obviously the global pandemic has been aggravated by the supply chain issues that have arisen from the conflict in the Ukraine.

In terms of the overall global situation, there are a number of factors that are obviously affecting supply chains at the moment. Materials costs is a huge factor. The cost, for instance, of steel have gone up around 30% over the last two quarters.

The availability of the elements required for production of batteries for electrical vehicles - they are now getting to the point where you just simply can't get them for almost any price. Indeed, some manufacturers of large equipment have announced that they are going to be diverting towards hydrogen for a fuel source rather than electronic batteries simply because of the fact they cannot get these materials.

Simon: What effect will this have on underwriting?

Nigel: I think we're going to see a number of different trends arising and some changes to the way that business is conducted, which will obviously affect the risks that underwriters have to look at. I think we're going to see more equipment being hired under hiring purchase agreements rather than owned, simply because you can't buy new. I think we're going to see increases, as I said, in materials prices. That I can see leading to greater impacts on clauses such as temporary works, where, for instance, for high-end value, you are simply going to have to produce a replacement that will do the job to some extent, and then possibly revisit subsequently when the actual piece of equipment becomes available, simply because the contractors can't buy the equipment and neither can we. I think cash deals may be something that we look more to in the future, simply in order to try and resolve those issues.

I also think site security is going to be a trend for the future. Clearly, as the cost of things increases, so does their value to opportunistic thieves and the actual need that they have to get a hold of that equipment in order to sell it on. You can see the demand for that rising as well. I think those are three points that are very much going to be something underwriters will have to consider. Let me ask you a question in turn. What effects do you think these points will have on pricing?

Simon: Well, business interruption indemnity periods will increase along with the periods for continued hiring charges so that people can replace plant and get parts in and not lose too much income.

We'll see inspection fees for statutory plants. They will increase due to inflation cost of fuel for the surveyors to get around, and their salaries.

In terms of endorsements, in terms on policies, there will be more onerous terms put in place to avoid fraudulent claims. We may see some companies changing their processes and procedures to meet both the demands of the market, and so they can adapt their working practices because of the lack of plant or due to the lead-in times. This could affect their rates and their premiums, too.

What do you see for the future of claims?

Nigel: I think sustainability is going to be a very key driver, and one that obviously Aviva has led great support to. Whether or not electronic and electric vehicles are the future, or whether ultimately the source of fuel becomes hydrogen, or even something else, I think that is going to be very much a driver for risk. Each of those presents attendant risks down to not only the vehicle itself but to how it is charged, how it is maintained, how it is dealt with on-site.

In terms of the costs of equipment hire, obviously, scarcity leads to increasing costs. We've seen that with the raw materials. We will see that with the equipment as well. It will lead to, I think,business interruption and obviously attended for construction delay in start-up cover, being more important. I think the losses there will increase simply as the lead times grow. I also think in terms of the trends that we will see, the costs themselves will continue to increase for the foreseeable future. We are seeing energy prices on the rise. The associated costs of production will rise along with both the materials and the energy costs required to create them.

We're seeing inflation, and we're seeing a shortage of workers who are actually able to carry out the tasks in question, at a time when the construction industry has grown 4% in the last two quarters. So I think the pressure is really hitting from all sides here. It's just a case of how the market can respond to it, and really how much leverage the larger contractors are able to bring to pair when putting forward larger orders

Simon: Nigel, are there any suggestions you have that would help our clients at this time?

Nigel: I think there are four main points that I would like to highlight.

The first is obviously risk management and the importance of site safety overall. There are some very helpful hints that I would direct any risk manager to our website where I hope they might be able to find some assistance there that is very helpful.

Site security is going to be key in the times ahead, as we've both mentioned. The possibility of fraud, possibility of theft, these are going to be on the rise. Of course, particularly with the changes to red diesel, there may be an increased focus given the rise in fuel costs as well.

Thirdly, I would point to the need for maintenance. It's always been there. It's always been done, but when you can't get hold of replacements, the need to keep the old running is obviously magnified far more than simply from the days where you could order another one from a catalogue, and it would be with you in a few weeks.

Those days have gone, but at least for the foreseeable future, maintenance, keeping things running, not least of which so you can sell it for the best price of the second-hand market if you need to, is clearly going to be highly desirable.

Last but not least, please do check your sum insured limits. Make sure that they're still adequate.

The way that prices are rising, what was good for you last year may not be good for you this year. Please do check your equipment is adequately insured, and the business interruption that you feel you may sustain is adequately insured.

Those avoid obvious problems with claims that can arise, and ensure that you are adequately covered and protected both for your own security and, of course, for that of any financial backers that you may have.