Briefing: Underinsurance and the holes in our customers' safety net

Insurance is often viewed as the safety net we never want to use. But, as it happens, it’s not an analogy I like very much, because nets have holes in them!

The trouble is that it is often an accurate description of the product because, as many clients are finding out far too late, their safety net does have holes in it – and these come in the form of underinsurance. 

Staggeringly, recent studies show that nearly half of SMEs are underinsured. More alarming still are the number of homeowners facing a marked protection gap.

Given that we live in increasingly volatile times, when we’re seeing the impact of climate change escalating every day, that’s surely not a recipe for long term security.

So how can we patch-up the net?

Mending and fixing

First, in my view, brokers and insurers must work harder to educate and communicate the value of insurance to their clients.

In last month’s column, I talked about how we need to use storytelling to help demystify cyber. We need to do the same for underinsurance too. That means talking to clients personally and explaining our often complex reasoning in lay terms.

Too often when we talk about insurance it can come across like we’re auditioning for the final of Mastermind.

At the same time, clients sometimes take misguided comfort from the fact they won’t require all the cover as long as they have enough for the smaller claims. They imagine they’ll be fine because they think a total loss is unlikely. But, as experts, it’s our job to explain their risk exposure and that this isn’t just about us trying to increase the cost!

Clients need to be really clear about what they could lose if they chose not to pay the premium. We can’t shy away from these tough conversations even though there is a lot we can do to mitigate the financial impact.

Wider impact

Nor should we forget that underinsurance isn’t restricted to property. The gaping holes in the safety net can stretch from inadequate liability limits to misjudged business interruption cover – leaving our clients dangerously exposed.

In a world where legal costs and compensations continue to rise sharply, can we be sure that cover limits of £2m, or even £5m are sufficient? One large injury claim could wipe that cover in a flash. 

Meanwhile, the scissors of inflation and the impact of geopolitical shocks on global supply chains continue to enlarge those holes. We’re seeing the value of insurance policies eroded as the cost of medical treatment, legal fees and compensation climb. The likes of Bodily Injury limits, set before Covid, may be woefully inadequate. 

Now, it’s tempting to call for mandatory changes to liability limits, but this could be too blunt an instrument.

Some of those limits may be ok for certain SMEs, in which case increasing them could just tighten the financial screws and price them out of the market.

That is why the second thing insurers and brokers need to do is make sure they are really listening hard to their client’s needs. We should be insisting on annual reviews. That way, we can gain a greater insight into changes occurring within our client’s businesses and make recommendations accordingly to help.

This, in turn, brings me to my final point. The rise in AI, property data and drone surveying presents us with a huge opportunity.

There is an enormous quantity of data out there. How can we use that information better to generate accurate dynamic valuations at scale, so we can help ensure clients have the correct sums insured?

Ultimately, working on education, listening more and embracing innovation are the keys to closing the protection gap. It’s up to us to help our clients to get it right. So, if the worst does happen, instead of a porous safety net, they find they have an impervious insurance shield.