Your business could face a financial shortfall during your next claim if your declared values have not kept pace with inflation. At a Marsh Asia webinar, 59% of risk and finance professionals we polled said they were unsure when they had last independently valued their assets, had not done so recently, or had relied on estimated values. That uncertainty can quickly turn into a costly coverage gap, reducing claim recoveries and increasing uninsured losses.
The Middle East conflict and resulting supply chain disruption have renewed cost pressure across the region, with ripple effects likely to persist. Oil prices remain elevated relative to pre-conflict levels, with operating costs for local industrial and commercial sectors increasing by 50%.
Inflation and disruption of this scale raise the cost of reinstating property, plant and machinery after a severe loss. When declared values on a policy no longer reflect the true cost of reinstatement, organisations can be underinsured without knowing it.
This is where the average clause applies. Within a property damage and business interruption (PDBI) policy, insurers may only pay out a proportion of a claim when the sum insured is less than the asset’s true reinstatement value.
How much could the average clause cost you?
The impact can be severe, and a high policy limit does not prevent it.
For instance, when a loss adjuster determines that an asset declared at US$60 million should have been insured for US$100 million, that shortfall is applied proportionally to any claim. A US$50 million loss would be settled at US$30 million, even though the policy limit could cover the full amount, leaving a US$20 million shortfall the business must absorb.
A common misconception is that securing cover to a high limit removes the average clause. It does not, because policy wordings vary. The most effective way to mitigate or even remove the average clause impact from your policy is through a professional insurance valuation.
The only dependable safeguard is an accurate declared value.
How a real estate valuation exposed major underinsurance and overinsurance gaps
A real estate business with 30 owned locations was found to have 23 properties underinsured with several of the largest by more than 50%. This represented potential exposures of US$370+ million. The same review also identified three properties that were overinsured by up to 293%.
Is adjusting declared values by an annual index or fixed percentage sufficient to prevent underinsurance?
An annual index or an annual fixed percentage increase is a reasonable short-term solution, but it rarely keeps declared values accurate. Every asset is unique, and broad indices can lack accuracy given different asset values change at different rates.
Common pitfalls in determining values include:
- Using market or book value in place of replacement costs.
- Carrying over the previous year’s declared values or applying a fixed percentage increase across the board.
- Declaring the cost of a preferred replacement rather than the cost of the asset actually installed.
The limitation is clear in practice - indices may understate or overstate true and current replacement cost. In one case, a widely published and regarded index indicated a 12% rise in price for an asset since its construction. However, when Marsh’s valuers checked against actual supplier data, the true replacement had instead increased by 17% to 22%, understating the price increase by up to 10%.
A professional insurance valuation establishes your assets’ reinstatement cost — the cost to replace them as new — using live supplier and manufacturer data, and corroborating approaches. The same rigour also reveals overinsurance, where premiums could be paid unnecessarily.
Are you adjusting your declared values by using an annual index or fixed percentages?
Get the true valuation of your assets today to avoid underinsurance.
How often should asset valuations be reviewed?
Asset valuations should be reviewed frequently to ensure declared values reflect current reinstatement cost rather than last year’s prices. A practical approach is:
- Conduct a full, on site valuation in year one.
- Carry out desktop reviews in years two and three.
- Repeat the full valuation every three years, or sooner if market conditions change materially.
In volatile markets, insurers increasingly expect a two year valuation interval. If values move materially during a policy period, an option is to endorse the policy mid term rather than wait until renewal. Responsibility for maintaining accurate values rests with the insured.
Answer these questions to find out if inflation has created a gap in your business insurance:
- How were your asset and business interruption declared values determined?
- When did you last commission an independent valuation of your assets?
- How much would it cost to reinstate your assets at today’s prices?
- Is your current maximum indemnity period sufficient for realistic recovery timelines?
Why do accurate business interruption declared values matter?
Business interruption (BI) insurance protects the lost profits during the period of recovery following a loss. If BI declared values are understated, insurers can apply proportional reductions exactly as they do for property claims, which can materially reduce payouts.
A manufacturer’s costly US$10m lesson when BI values fell short
A manufacturer in Asia suffered a major loss following a fire, eventually settling a claim for US$20 million for business interruption, mainly covering increased cost of working. However, due to the application of the average clause, their claim was reduced by 50%, resulting in US$10 million of uninsured losses.
When assessing BI declared values, focus on three areas that are most often misjudged:
- Incorrectly treating fixed costs as variable: In a partial loss, most fixed costs continue and must be insured in full.
- Choosing the wrong basis of cover: Whether you use gross profit, gross revenue, standing charges or only additional increased cost of working, the basis must match how your business operates.
- Underestimating the maximum indemnity period: As inflation and supply chain disruption extend recovery timelines, an insufficient indemnity period can produce losses even where limits appear adequate.
Is inflation eroding your business interruption cover?
How a BI review averted a US$100m shortfall for a technology company
A technology business in Taiwan was concerned that it could not recover from a major loss within its existing indemnity period. In response, Marsh forensic accountants developed a financial model to assess its appropriate BI declared value and facilitated a workshop with stakeholders to assess their maximum foreseeable loss.
The review helped the organisation understand its true exposure and extend its maximum indemnity period from 12 to 24 months, potentially avoiding over US$100 million of underinsured losses.
Why review your values in a softening market?
The current softening environment — with premium rates across Asia down 5% in the first quarter of 2026 — presents a practical window to update declared values. Correcting declared values now allows a business to strengthen cover, manage risk exposures and ensure accurate declared values, without the premium pressure that a hardening market would impose.