The underinsurance of property risk is impacting both global and local markets says Tony Boobier.
Modelling in the US, following Katrina and other weather events, reveals that up to 25% of residential housing stock may be under-insured by as much as 50%. Not only does this under-insurance create an unnecessary burden on homeowners who find they have insufficient funds, but at the same time it represents lost premium income for insurers and reinsurers.
Under-insurance has arisen mainly due to the old tabulated and relatively subjective approach to valuations, a process which is being rapidly overtaken by new “component-based” pricing methods which model the rebuilding cost of a property from the foundations upwards. This method is equally suitable for commercial and residential properties, and identifies over-insurance as well as under-insurance.But does this cause conflict for insurers who suggest an increase in the level of cover? Apparently not. Customer confidence appears to be heightened and as profitable retention improves, it's clearly a win-win scenario – especially where the figures are independently and impartially calculated. Transparency of the calculation is such that it is also possible for the property owner to check the adequacy of home insurance online.
How does that translate for the UK? As the construction boom continues, heightened by the 2012 Olympics and major housing development in the South East, we need to ask questions not only about the ability of the property claims industry to undertake repairs, but also the wider impact on rebuilding costs which forms one of the key factors for premium calculation.
Based on the wider global experience, component-based rebuilding cost calculations seem to provide a more accurate way of identifying the real cost of construction at any given time, and could be the only way forward. It also allows much better understanding and prediction of additional costs where shortages in labour and materials occur, leading to price surges. Getting the level of insurance right either at home or abroad has to be a precursor to accurate risk management, as without it any prediction may be no better than a shot in the dark.If, by a happy coincidence, this also leads to increased premium coupled with enhanced customer satisfaction and better retention, then it must be something worth investigating.