From Insurance Age (November 2015)
Brokers urged to help in fight against underinsurance and take the lead in educating clients
Written by Larry Ferguson
Brokers and insurers are concentrating their efforts on addressing the significant problem of underinsurance.
The popular image is of a harried SME owner who does everything for his or her business and consequently does not pay enough attention to insurance matters.
The implications for a business with inadequate insurance to cover a claim can be catastrophic and often lead to conflict with a broker.
But the factors that lead to underinsurance extend far beyond just the issue of time according to Paul Anscombe, chairman of the Insurance Brokers’ Standards Council (IBSC). Anscombe, who is also the managing director of Seventeen Group, explained that competitive market conditions can be a major element.
“When the focus is on cost it takes a brave broker who stands up to their client and says ‘I know premium savings are key for you but the number one priority is, are you properly covered in the event of a claim?’”
The IBSC recently launched a consultation paper setting out what a broker’s duties should be in relation to underinsurance. What constitutes formal practice regarding what a client can expect from a broker could be changed depending on replies from members.
Where a broker’s duties stop and a client’s responsibilities begin causes confusion Anscombe explained, as he emphasised that brokers should make it clear to clients that it is their own responsibility to be adequately insured.
A recent Aviva guide addressing the problem of commercial underinsurance highlighted a 2014 survey of its clients that identified 177 cases where customers had been underinsured on average by £486,000.
Ian Ferguson, customer solutions director at the insurer, said the reasons for underinsurance can include businesses not updating the initial valuations made of their property and stock. “It can be the same for personal lines too,” he observed. “For many of us we have accumulated more possessions and gadgets over the years since we first took out our contents policies.
“We may even have inherited items but are we checking that the sum insured on our cover reflects what we own today?”
A claim is likely to be settled on the cover a customer has rather than what they should have, according to Ferguson, which can put a “huge financial strain” on the person or business who has to pay the difference in costs.
Dave Greaves, head of SME at QBE, described underinsurance as occurring in three forms: innocent, deliberate and innocently deliberate. The first scenario relates to a lack of customer expertise, the second is deliberate to reduce cost and the third involves not taking appropriate cover knowing the insurer may still be obliged to pay unless it can prove the consumer was reckless.
Greaves referred to people buying insurance online without any advice and added point of sale documents on websites need to be much better.
David Thomson, Sutton Winson’s managing director, noted underinsurance can also arise when brokers do not highlight the importance of correctly identifying reinstatement values. Regarding solutions to the problem, he argued for “more proactive education of policyholders by brokers and insurers – incorporating cost effective professional valuations”.
He continued: “Where brokers’ instincts raise concern over the adequacy of sums insured and clients choose to ignore that input then brokers need to come to terms with the fact that in the long run not all clients are good clients.”
Robin Wood, RWA chairman and an IBSC adviser, remarked: “Someone needs to come up with a scheme, perhaps insurer funded, that provides 2015 valuations at very modest cost to start setting a modern benchmark for property, asset and other insurance values.”
Alternatively, he raised the possibility of the risk of underinsurance being insured as an add-on and argued the government needs to invest in an ongoing public awareness campaign.
Eamonn Browne, director at James & Browne Insurance Brokers, said: “Bar making it compulsory for clients to produce evidence of value for us to work on then the only possible alternative, like many household policies do, is to have an ‘up to sum insured’ selection process – even for commercial risks.” On professional valuations, he continued: “Maybe insurers should reward the client for doing this perhaps with a 5% premium discount.”
Greaves concluded: “The solution is about education and advice from brokers, moving away from the lowest common denominator which is price, with more informative websites and better design of products.”