Underinsurance: the impact on bespoke homes

Explore the impact of underinsurance in the HNW market.

It is evident from recent commentaries that underinsurance remains a challenge for the industry and one that we are not immune to. High indexation and increasing repair costs (as a result of higher costs of materials and labour); are leading to continued claims inflation as can be seen in comments below provided by Sedgwick:

  “In the insurance repair sector, we’ve been    working through unprecedented times.    Sedgwick tracks repair cost inflation using an    index which looks at variations in insurance    repair labour, material and plant prices and    these have shown an increase of 9.35%   across 2021 followed by 13.1% in 2022. 

 Contractors have struggled to secure the materials they need and maintain their workforces  as tradesmen have demanded regular wage increases to match hourly rates being paid by  housebuilders. The overall effect has, of course, been increases in contractor prices. This has directly affected customers in cost increases for work carried out, along with increases in the anticipated cost of work, if required.  A rebuilding cost calculated before the start of this unusual inflationary period would need the significant uplift of c. 25% to reflect the price of completing work in 2023. 

There are plenty of current examples of underinsurance, and where they impact the reinstatement of a home. It can sometimes be difficult to determine whether this comes as a direct result of recent inflation or is a historic underinsurance problem, exacerbated over the past few years.

One of Sedgwick’s major loss adjusters found that their portfolio of claims held up to 75% of properties suffering low sums insured, with instances of direct impacts to customers where their building sums insured had been exhausted.

A particular problem has been seen with non-standard high-quality properties.  The standard of finishes continues to cause an issue, with some customers forgetting about the bespoke or handmade elements inside their home. The shortage of skilled labour, combined with material price rises, has significantly impacted reinstatement costs, often well above standard inflation.

In addition to individual material inflation, the price being quoted on tenders is increasingly difficult to predict, with factors such as contractors manage their own staffing resources, local market conditions and volume of work all at play. We also anticipate an impact following the announcement of corporation tax increasing from 19% to 20%.”

There is no doubt that claims inflation is leading to more underinsurance especially for gold, valuables, art and collectables. Inevitably these hard currencies will hold their value better at times of low interest returns on investments. We are now hearing that we should invest in whisky as the next big investment return. Even so, underinsurance especially of general home contents and buildings is driven by poor initial assessment and lack of considered and regular review. The industry has to do more to ensure customers are adequately insured.

Whilst current forecasts are suggesting that inflation will begin to fall throughout 2023 the House Rebuilding Cost Index remains in excess of 18% (as at February 2023). As a result of high inflation, we are seeing an increase in the number of claims where underinsurance of the buildings is a factor and our HNW team have the rare phenomenon of currently handling several claim where the cost of repairing partially damaged homes is expected to exceed the available buildings sum insured. This is highlighting the importance of regularly reviewing the adequacy of the sum insured and not simply relying on indexation of sums insured especially for heritage, listed or non-standard domestic homes.

There are various reasons for the exceptional claims we are currently handling. No doubt inflationary factors are impacting but fundamental under valuation is the main reason for the inadequate cover. The costs we have seen charged for demolition, shoring, scaffolding, strip out and protection are exceptionally high these days and often not adequately factored in to the assessment of the buildings sum insured. The exceptional cost of a repair solution such as total underpinning of a subsiding building is understandably not factored into a rebuilding cost assessment. But we have found claims for house fires that can be repaired are challenging the available cover and in some cases are far exceeding the cover.  If insurers have not committed to a reinstatement basis of claim settlement they may want to cash settle to the maximum liability i.e. the sum insured plus accrued index-linking and then leave their customer to make some very difficult decisions about what to do with their damaged home.

As noted we have especially seen the impact of claims inflation on gold, valuables, art and collectibles. A contributory factor for this can be that during the most recent periods of recession the price of gold has generally increased, as this is seen as a more valuable asset than other investments. This trend can also been seen in periods of higher inflation, such as that which we are currently experiencing, creating a higher potential for indexation not to accurately track the increased value of these items. 

Throughout the last year we have also experienced a changeable market for luxury watches on the secondary market with recent reports indicating that prices are reducing following sharp increases in 2022 as detailed in our earlier article; you can view this here. 

In addition, we have seen an increase in underinsurance of inherited and gifted jewellery items where a valuation for insurance purposes may not be available. As a result items are not being insured for the full replacement cost but rather for probate or second hand replacement.

All of this only further highlights the need to regularly review sums insured to ensure that these are in keeping with the current rebuilding and replacement costs. Within our policies to mitigate the risk of underinsurance for our customers we cover extended replacement where a professional valuation has been completed within the last 5 years and approved by us. We may also be able to provide an appraisal service that we would fund subject to eligibility criteria.

Should you wish to find out more about this service then please speak to your usual Underwriting team.