Moreover, according to the European Central Bank, a large majority of euro area enterprises expect their prices to increase going forward. Expectations of overall higher selling prices are shared across firms of all sizes.
In this environment, it is more important than ever to be mindful of the risks of underinsurance that may impede business recovery, as claims payments could be capped below the actual present value of lost assets. Further, stipulations in policy terms could mean additional implications if underinsurance occurs.
What can lead to an organisation being underinsured?
Underinsurance typically occurs when the declared values of assets (such as property, buildings, and contents) and exposures fall below the actual values, with potentially significant consequences, including:
Policy loss limits
If the value of insured assets goes up, but the relevant loss limits are not appropriately increased, a business may not have full indemnity in the case of a major loss that exceeds the policy loss limit.
Property — application of average or underinsurance clauses
Legislation, insurance market practice, and policy wording vary across Europe, but in most countries average or underinsurance clauses will apply. Most policy wording will include at least one average provision. These clauses allow insurers to proportionally reduce a claim. In the event of underinsurance, the insurer will proportionately reduce the amount it is obliged to pay based on the difference between the insured value and the actual value of the lost asset.
Explanation of common average provisions and their implications
The insured declares values on a reinstatement basis on the first day of the policy period, but the insurer pays the cost of repair or reconstruction at the time of the loss. The accuracy of the values is assessed retrospectively in order to determine whether the value declared by the insured was accurate at the start of the period of insurance. If the values declared on day one of the policy period are found to be inadequate, then the insurer can proportionately reduce the claims payment. To avoid underinsurance deductions, make sure you provide accurate values to your insurer at the inception of the policy.