Safeguarding against underinsurance: how insurers can protect policyholders

Many policyholders, particularly in periods of economic uncertainty, can unknowingly become underinsured. The resulting financial strain is a growing concern as we have been in a period of high inflation which has driven up replacement costs.

In this article we provide a snapshot of the current underinsurance landscape and the steps insurers can take to address the associated risks.

What is underinsurance?

Underinsurance occurs when the insurance coverage falls short of what would be needed to fully recover in the event of a loss. For instance, if one’s home is insured for £200k, but its current replacement cost has risen to £300k, they would be underinsured by £100k. This gap could leave them financially vulnerable and paying out-of-pocket expenses if a triggering event occurs.

What causes underinsurance?

Underinsurance isn’t just a matter of forgetting to update your policy. Economic factors such as inflation and the rising cost of materials mean that replacement costs are higher than ever. Often, policyholders don’t realise that their coverage limits are based on outdated valuations. This is why a recent investigation by the Financial Conduct Authority (FCA) highlighted underinsurance as a growing concern. Additionally, many consumers might not fully understand the terms of their policies further leading to gaps in coverage.

Businesses are also impacted by these risks, as underinsurance can affect continuity and potentially lead to closure. According to the FCA, one concerning trend is that many small business owners underestimate the full replacement cost of their assets, leading to insufficient payouts when they need it most.

The current insurance landscape

A recent analysis by Rebuild Cost Assessment found that 9 out of 10 UK properties are insured for the wrong amount. According to the data, three-quarters of properties are underinsured, with these properties typically only insured for two-thirds of their true value.

Underinsurance

• 76% of UK properties are underinsured. This can severely reduce the amount paid out following a property damage claim.
• On average, underinsured buildings are covered for just 63% of the amount they should be.
• 70% of residential properties and 79% of commercial properties are underinsured

Overinsurance

• 20% of UK properties are overinsured which means more is being paid for insurance than needed.
• On average, overinsured buildings are covered for 122% of the amount they should be.
• 25% of residential properties and 17% of commercial properties are overinsured.

This issue is not limited to properties. Further investigations by the FCA have uncovered that some insurance providers have been offering settlements below fair market value for written-off vehicles. Alarmingly, some providers only adjust their offers to fair market value when customers dispute the initial settlement: a practice that violates FCA rules.

Underinsurance violates the principle of delivering fair value under the FCA’s Consumer Duty regulations, where customers must be informed, supported, and equipped to make effective decisions about their coverage.

How insurers can support policyholders

To address underinsurance effectively and restore customer trust in the insurance process amidst economic challenges, insurers can take some proactive steps:

1. Offer regular policy reviews: By providing annual policy reviews, insurers can ensure coverage remains accurate, especially after significant changes like renovations, market value shifts, or business expansions. Automating tools that can link policies with a suitable index (such as linking home insurance to property value indices) can assist in real-time value tracking and offering suitable advice to customers.
2. Predict and provide personalised valuations: By leveraging predictive AI-based models, insurers can identify customers with high risk of underinsurance and help them assess the true replacement value of their assets, enabling tailored, up-to-date policies that meet each policyholder’s unique needs.
3. Streamline customer touchpoints: Simplifying and speeding up administrative processes, such as underwriting and claims, is essential as complex processes can deter customers from maintaining adequate coverage. Automating these and offering tools, such as self-service options through digital platforms, can improve efficiency and create a smoother customer experience.
4. Educate on policy terms and coverage gaps: Insurers can improve policyholder engagement by offering clear, accessible information on policy terms, helping them understand their coverage levels.

Why insurers should be focusing on underinsurance

With today’s rapidly shifting economic landscape and increasing regulatory scrutiny, it’s critical for insurers to ensure their customers’ policies are appropriately priced to reflect the true risk and value of associated assets.

The FCA’s Consumer Duty principles stress the importance of delivering good customer outcomes, fair value and ongoing policy support. Addressing underinsurance helps insurers meet these expectations while promoting financial stability and trust.

How 4most can help

At 4most, we provide proactive solutions to help insurers build robust, bespoke tools and automate processes that support insurers and mitigate underinsurance risks. By partnering with 4most, insurers can enhance customer experience, ensure policies reflect accurate asset values, and reinforce their role in promoting financial stability in today’s dynamic environment.

Get in touch if you would like to learn more about how we can support your organization – info@4-most.co.uk.0