In our article you can read what Adrian Jurubita, Insurance's Property Practice Leader advises on how to avoid underinsurance, whether for comercial or consumer insurance.
As Central and Eastern Europe's economy navigates through an economic storm of soaring inflation and escalating prices, a daunting concern has risen to the fore - the perils of underinsurance.
The region has been witnessing an unprecedented surge in energy costs, industrial commodities, construction materials, and labor expenses, leaving no sector untouched by the effects of the economic storm. For the insurance industry, this presents a formidable obstacle, as accurately gauging insurance sums become increasingly difficult amidst rapidly escalating prices. The consequences of underestimating the value of insured properties can be severe, leaving policyholders vulnerable to financial risks and potentially hampering the recovery process in the event of a claim.
The repercussions of underinsurance are experienced worldwide in insurance policies, not only in the CEE region, posing significant consequences for policyholders, particularly during times of adversity. This phenomenon occurs when the specified insured amount falls substantially short of the actual value of the property, leaving policyholders exposed to severe financial risks.
To combat the implications of underinsurance, insurance clients first of all must be vigilant in declaring correct Total Sums Insured (TSI) for their properties, at the time of the conclusion of the insurance contract, as for property insurance, clients bear the responsibility of declaring the correct TSI. Failure to do so leads to penalization through the application of the underinsurance clause. Under this clause, policyholders receive claim payouts proportionally to the declared sums insured relative to the correct values. For instance, if a policyholder declares sums insured at 75% of the accurate values, they will only receive 75% of the correct claim value.
However, nowadays, critical issues also might arise with policies that have not been indexed for over two years, as they are likely to be significantly underinsured. The sharp rise in inflation over the past year exacerbates this problem, rendering even sums insured updated just a year ago inadequate. To avert potential losses, policyholders must take into consideration the inflation's impact and promptly increase the sum insured on their insurance policies. Failure to do so empowers insurers to reduce claims by a percentage representing the difference between the current value of the insured item and the agreed sum insured in the policy, thus exposing policyholders to the risk of underinsurance. Furthermore, it is essential to recognize that underinsurance applies not only to total losses but also to partial damages.
The inflationary surge since late 2021 has prompted many insurance clients to revise their sums insured in 2022, and Colonnade Insurance also experienced a commendable surge of over 10% in sums insured for existing clients during the initial five months of 2023. This upward trend is encouraging, but the continuation of this approach is imperative as the persistent nature of inflation calls for a continuous commitment to staying informed and adjusting coverage as necessary to confront the ever-changing inflationary tides.
Colonnade Insurance has been taking proactive measures and periodically draws customers' attention to the risk of underinsurance to safeguard them. Adrian Jurubiţă, Property Practice Leader at Colonnade Insurance emphasized the importance of updating insurance sums regularly to reflect current market conditions. He advised, "Inflation's relentless impact is spreading across the region, leaving disruption on reconstruction, replacement costs and labor expenses. To safeguard against the perils of underinsurance, we urge our valued customers to conduct an annual reassessment of their insurance sums, ensuring alignment with the ever-evolving economic landscape."
While underinsurance is a significant financial problem for consumer insurance, such as home insurance, in the realm of commercial insurance, the consequences of underinsurance could be particularly detrimental, as property losses or third-party claims may not be adequately covered by the policy. As the economic landscape remains volatile, businesses must remain vigilant in keeping their insurance coverage updated to mitigate potential financial risks. Collaborative efforts between insurers and clients will be crucial in navigating these turbulent economic waters and shielding policyholders from the menace of underinsurance.
Colonnade Insurance advises its clients to stay proactive, actualize their insurance sums, and confront the dangers of underinsurance head-on. By doing so, individuals and businesses can better navigate these uncertain times with greater resilience and financial security.