Why does underinsurance exist?
The reasons for such underinsurance ( defined as the gap between the declared value of possessions when taking out insurance or renewing a policy, and the real value of those items) are numerous.
Often, it is down to the homeowner not having accurately calculated the value of what they own. This could be because they have never carried out a systematic audit of possessions or room-by-room tot-up. It might be that they have not commissioned regular valuations of jewellery, watches or other precious items and that original expert valuations are now vastly out-of-date.
Sometimes, it is because a homeowner does not proactively raise their insurance limits, to keep premiums stable. Others have created gaps in coverage because they have not had an expert insurance broker guide them through the process. They have simply ticked boxes on an online insurance sales form, buying a standard home insurance policy and being unaware of clauses and exclusions that impact their luxury portfolio.
Some can be caught out by single item limits that exceed the actual value of an item they own. A much larger proportion of those caught out by underinsurance at the present time, however, have not kept an eye on economic trends.
Many homeowners have based their sum insured on their home’s market value rather than the cost of rebuilding it, in the event of a major incident occur. If a storm caused significant damage, the home might need to be rebuilt from the ground up, including architects’ fees, labour, contractors, and rubble removal. New materials would alsoneed to be purchased.
All these factors add to the homeowner’s original market value, and it is this larger figure that should be the sum insured on the policy. Experienced brokers advise clients that valuations not accurately factoring in all of these costs are damaging. Similarly, valuations of possessions that are five or even three years old do not reflect current market prices for items such as jewellery and watches. Pockets of underinsurance can emerge throughout a possessions audit. Any home insurance claim, regardless of size, would be impacted, if the insurer discovers underinsurance. Even if the amount claimed is well below the overall declared sum insured, the payout will be reduced by the degree of underinsurance.
For example, if your sum insured is only 70% of the actual value of your home, you would only receive a 70% payout of any insurance claim.
Weather risks that expose underinsurance
The most likely situation that could catch you out, if in this position, is flooding. Latest Government figures suggest 6.3 million homes face a flood risk.3 Homeowners focused on purely river or sea flooding should beware. There are almost twice as many homes with a risk of surface water flooding (4.6 million) as there are homes at risk of marine or river flooding (2.4 million).3a Between April 2023 and March 2024 alone, the UK experienced 13 named storms, Storms Babet, Ciarán, and Henk issued 750 flood warnings (5 severe)3b, there is much to consider, even before considering summer flash floods, with their random nature. Anyone, anywhere, can suffer a property catastrophe that exposes their underinsure
How to tackle an underinsurance or overinsured situation
If you have little or no idea what your home’s rebuild cost would be or what the value of your possessions is, it’s time to take action. You can start by walking around each room and noting the value of all you would need to replace, from carpets and furnishings to fixtures, clothing, electrical items and leisure equipment.
Assessing a ballpark rebuild figure for your home can be done by using a service such as the Building Cost Information Service (BCIS), but a preferable route to follow, particularly for High-Net-Worth homeowners, involves working with a broker. Complex situations regarding covering possessions can be fully discussed and the best insurance strategy determined. Specific items can be given their own insurance protection and any ‘grouping’ of valuables, which is leaving you exposed to losses, can be rectified. A broker can also help you commission a specialist rebuild cost survey, tailored to your individual property alone. This will identify any underinsurance but could save you money by highlighting over-insurance. The risks of having underinsured homes and possessions are significant, so do not turn a blind eye to it. Thinking a disaster will ‘never happen to you’ is becoming increasingly unsound reasoning in an age of climate change. Take stock of your situation and figure your sums out today by getting in touch with a broker who can assess the unique risks associated with your assets and recommend bespoke policies tailored to your needs. If not, you could experience significant losses.
3 https://www.gov.uk/government/publications/national-assessment-of-flood-and-coastal-erosion-risk-in- england-2024/national-assessment-of-flood-and-coastal-erosion-risk-in-england-2024 (section 1.3) 3a https://www.gov.uk/government/publications/national-assessment-of-flood-and-coastal-erosion-risk-in england-2024/national-assessment-of-flood-and-coastal-erosion-risk-in-england-2024 (section 1.5) 3b https://www.gov.uk/government/publications/national-assessment-of-flood-and-coastal-erosion-risk-in- england-2024/national-assessment-of-flood-and-coastal-erosion-risk-in-england-2024 (section 2)