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Why your business could be underinsured

February 28, 2024

While inflation in Ireland is on the decline and is expected to fall to a low of 2.7% in 2024¹, currently, the prospect of prices fully reversing to pre-pandemic levels remains pretty slim. Instead, price increases are estimated to stagnate, meaning we likely won’t see a difference in our cost of living for some time².

What this means for insurance is that the situation remains largely unchanged versus a couple of years ago. The cost of rebuilding properties remains at an all-time high when factoring in building materials, demolition, labour and legal costs. According to the Central Bank of Ireland, 1 in 6 Irish homes are currently underinsured, covered only for an average of 75% of their correct rebuild cost³.

The picture for small to medium enterprises (SMEs) is more staggering. Within the UK, it is estimated that exactly 50% of all businesses and 80% of SMEs are underinsured according to Aviva’s annual Risk Insights Report, and a similar stark reality faces Irish businesses today.

What is underinsurance?

If your insurance does not sufficiently meet your business requirements in the event of a claim, then you are underinsured. This can be due to setting cover limits too low or insuring assets for insufficient amounts.

For example, if your property is valued at €1,000,000, but is only insured for €500,000, then the amount payable will be reduced by 50% because the building is underinsured by 50%. 

This would mean that even if you claim for €10,000, despite being insured for €500,000 of your property, you are still 50% underinsured. The insurer will only pay 50% on the €10,000, leaving you with a maximum of €5,000. No matter how small the claim is, you will always be subject to that 50% limit.

Put simply, if you suffer from any type of property or business loss that results in a claim, you might find that it could fall short of what today’s actual cost is to replace or rebuild. How would your business cope if you suffered a major loss, but were underinsured?

How can you avoid being underinsured?

Commercial property

Rebuild costs for properties have risen sharply over the last few years. This is the key area where your business could be at risk. Market value is not equal to rebuild cost, and it is advisable to obtain a rebuild value on your property every three to five years. However, as we are currently seeing the highest level of inflation in some 40 years along with supply chain issues, there has never been a more important time to review your cover to ensure it remains sufficient.

It is also important to consider listed buildings, landmark buildings, and those otherwise ‘outside the norm’ as these would need the attention of specialist construction workers, and therefore need to be assessed on-site by experienced valuers, contributing to increased costs.

Contents, stock, plant, and machinery

The value of your business assets will change constantly, and it’s important to stay up-to-date, especially during times of peak stock levels so that you are aware of your maximum contents value. Creating an asset register and regularly checking replacement costs will ensure they are accurate.

Business interruption

Material and labour shortages, supply chain hold-ups, factory closures, and restrictions at ports all mean that in today’s conditions, it could take longer than usual to return to the position that your business was in before the loss occurred. You may need to consider extending the indemnity period of your policy.

You will also need to consider your reported turnover, too. If this isn’t reported correctly, you may find that the payment falls short in a business interruption claim.

How NFP can support you

We’ll conduct a no-obligation review of your insurance, to thoroughly assess your business’s specific needs and potential risks. Our commercial specialists will help uncover your underinsurance risks and build a robust protection strategy that keeps your business safe and thriving.

Concerned about how underinsurance could threaten your business? With over 50 years of combined experience, our commercial insurance team is on hand to help. Read more in our commercial buildings insurance section.
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