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Commercial lines underinsurance – assessing the role of the insurance broker

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“We rely on accurate data for the sums insured in order to price correctly and avoid the risk of underinsurance should the insured have to make a claim,” he said. “On the bigger, more complex commercial properties, we have a certain level of oversight which enables us to review the values being proposed, but on e-traded products, those small errors or underestimations could lead to big consequences if a claim is made.”

Echoing this sentiment, Alun Jones, chief commercial officer at Addresscloud, noted that insurers rely on the information provided to them by their broker partners and their policyholders – and this may not be accurate or recent. Many policyholders will use historic values or indexation as their estimated sums insured, he said, but with the current rate of inflation and other global challenges, such as the war in Ukraine and subsequent materials and labour shortages, these could be significantly out of date.

“There is no reason why insurers can’t have accurate, up-to-date information right from the beginning,” Jones added. “We have detailed information building costs updated on a monthly basis, allowing us to give insurers a realistic estimation of sums insured, the tools are out there but they need to be used at the correct stage to improve the customer experience as well as a profitable outcome for the insurer.”

Andrew Slevin, director at Charterfields, also emphasised that insurers rely on policyholders to declare accurate values to be able to price risk appropriately. The trouble is, he said, that policyholders often have limited or unreliable information on their property portfolios. This can be due to poor record keeping, differences between how property and insurance teams look at the assets, or limited resources.

“While insurers have been increasing their requests for further information during the underwriting process,” he said, “getting this information updated in time for renewals is highly challenging, putting a lot of pressure on underwriting teams.”

Examining the measures insurers can take to ensure more accurate pricing of assets, Woodhams highlighted the key role that technology has to play in creating timely solutions. There are services that can locate the risk address and provide data on the size and construction, he said, but even with this, it is impossible to know for certain what lies beyond the outer façade.

“We have other tools at our disposal, and resources to validate data on risks,” he said. “We can look to indexation and data from the Royal Institute of Chartered Surveyors (RICS), for example, but the best way to ensure we are pricing correctly, and fairly,  is through risk surveys. 

“We only want to write credible business for brokers who understand their clients’ current requirements.  Presenting us with last year’s data at renewal won’t wash as we know in the current environment, that those are likely to be out of date and not a true reflection of today’s rebuild value.”

For his team at iprism, Woodhams said, it’s crucial to work closely with their broker partners to push better quality and more frequent surveys throughout the life of a policy, particularly when reinstatement values can fluctuate so widely within that policy cycle.

“And working with independent valuation companies and assessors can help the firm to understand not only where the risk address is, and the geographical boundaries,” he said, “but also the detail of what’s inside, the stock, the tools, the machinery and how much it would really cost if there was a claim.”

What’s currently available to insurers?

Assessing the measures currently available to insurers, Addresscloud’s Jones highlighted that the firm can provide pre-fill data on key measures to support the correct assessment of risk and pricing such as the size, use and rebuild value of any given property in the UK, this is an independent figure, consistent across the country.

This data can aid the validation of the submission and facilitate honest conversations with the policyholder at an early stage when determining the value of the sums insured, he said, delivering the best service possible and getting the price right from the start. This data-driven approach allows insurers to generate quotes based on the facts of the submission, not estimations that could be unreliable or out of date.

“We have heard that some insurers are automatically and unilaterally adding a large percentage uplift to declared values, where the policyholder doesn’t significantly change figures from the previous year, as a means of ensuring that cover is adequate,” added Charterfields’ Slevin.

“While this is one approach, policyholders would benefit from more transparency from insurers and brokers on the breakdown of how premiums are calculated. This may remove one of the barriers (that higher values equal correspondingly higher premiums) to the regular revaluation of assets.”

Though the “ultimate onus” is on the policyholder to understand their business beyond the property boundaries – taking into account stock, seasonality, business interruption, rebuild costs, and of course, their staff -, the broker does play a key role in helping ensure a client accurately represents their risk profile to an insurer, Woodhams said. And he would like to see more brokers pushing for independent surveys and assessments and calls for mid-term assessments to check that values are in line with current market prices.

“For our part,” he said, “we’re writing a lot more business subject to survey to highlight the importance of taking these additional measures. We all need to work together to battle underinsurance, we know there’s a problem and we cannot afford to bury our heads in the sand.”

Brokers as the gateway to success

The broker occupies a gateway role between the policyholder and the insurer at the first point of contact, Jones said, and as such, the broker is pivotal to the successful placement of business that can be realistically priced to ensure full coverage for the customer.

“It’s important for brokers to be able to get the right price point from the start of the process, and for that they need data,” he said. “I’d like to see brokers investing in data partnerships so they can better understand the risks they’re presented with and set realistic expectations for their client on premiums, as well as give insurers the granular level of detail they need to price accurately.”

Slevin highlighted that an encouraging trend he has seen develop over the last few years has been the push by brokers to educate clients on the increased risk of underinsurance in the current high-inflation environment.

“While many brokers have encouraged clients to review declared values on a regular basis, this has not always been heeded, particularly when insurers have been willing in the past to remove average clauses from policies,” he said. “Now that these clauses are making a return, or insurers are insisting on other (tighter) policy terms, brokers have a key role in coaching policyholders to understand and manage their exposure.”

What are your thoughts on the challenge of underinsurance? Please feel free to share your comments below.



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