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The Importance of understanding “Underinsurance”

Mar 31, 2022

Now is the perfect time to think carefully about your Sums Insured. The recent unfortunate and devastating storms and floods across the South East has highlighted a huge problem with underinsurance, particularly for home, contents, commercial property and business insurance policies.

“What is your “Sum Insured?”   This will represent the maximum amount your insurance company will pay. If you are underinsured, you can be penalized in the event of a claim – and then in reality, you have paid for an insurance policy that doesn’t cover the full cost of replacing your property/assets. This can lead to a large financial impact on you, your family or your business.

Factors that also contribute to being underinsured:

  • Knowingly electing a smaller Sums Insured. Whilst this does decrease the premium you pay each year, it can mean, in the event of a loss, that you will be underinsured.
  • A gradual accumulation of possessions. This is why it’s important to review your assets and/or contents each year as you buy more things.
  • Not accounting for upgraded assets. As we tend to replace with better quality and more expensive items, we need to make sure the level of insurance cover reflects the new replacement value.
  • Financial prioritization. Choosing a premium you want to pay vs. insuring your assets or property for the full replacement value.
  • Relying on bank valuations. They are typically conservative, however also include the predicted sale price including the land. Insurance requires the replacement value of the building/contents excluding the land. Sale price is not reflective of rebuild costs.   
  • Increased building/repair costs.  These costs increase every year, sometimes due to the fact that the items we buy become more complex with technology.   For example – Cars are more expensive to fix these days because of the technology within them, and the cost of building materials has risen at least 30% over the last 12 months. This is due to supply. This combined with the added pressure that a major event (pandemic/storm/fire/flood) ads to the building/repair industries as resources and labor becomes scarce which in turn pushes up the cost to rebuild further. 

In the event of a major claim, it’s important to be adequately insured, otherwise you may find yourself in a difficult situation unable to rebuild and get back on your feet to your pre-loss position. The realisation that you didn’t have enough Insurance is often heartbreaking for many, and whilst a portion of the claim could be covered, somehow you’ll be up to finding the rest. This is why the value you place on your home, contents, cars, commercial buildings / property / contents, is so important, and will help you sleep at night getting this right. 

As we learn through every major catastrophe, it’s important to review your Sums Insured each year before you renew based off last years figures. A lot can change in a year! 

If you wish to discuss and review your Sums Insured with your Adviser, please contact Austbrokers Comsure on 1800 122 194.

  


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