The rise in inflation creates a greater risk of underinsurance, says Nuno Rodrigues, director of property and engineering at MDS, a Brokerslink partner
The Covid-19 pandemic has brought major disruption to logistics chains across the world. We’re still feeling the consequences and they could take a few years to fade away. The pandemic, along with rising energy, raw material and foodstuff prices, as well as the sudden eruption of war in Ukraine, have led to historically acute inflation levels the likes of which we had not witnessed this century.
The price hikes impact all sectors of the economy and the insurance sector is no exception. The repercussions of inflationary pressure and disruption to supply chains in insurance contracts have severe impacts.
Rising prices, of which we would draw attention to material and labour costs in construction and renovation projects, can mean insufficient funding which, if a claim arises, will bring harmful consequences to the interests and assets of the insured.
Correct determination of insured capital is the basis for good settlement, and such determination always falls under the policyholder’s responsibility, not only at the inception of the contract but for its duration. This is a point of capital importance, especially in difficult, volatile economic junctures, like the one we’re living through.
It is when a claim arises that insurers confirm whether insured amounts have been correctly determined – a task that nobody other than experts should perform.
Now, in a world shaped by inflation, we are at greater risk of underinsurance when an accident happens; meaning that the insured capital is lower in value than the actual assets at risk.
In such cases, contracts only compel insurers to take on liability in the proportion between insured capital and its actual value (proportional rule).
To avoid this, insureds must diligently review and update insured amounts based on market prices at the time of review.
We must point out that greater plant and equipment replacement and repair costs have other consequences, namely, they entail greater risk of replacement or repair not being financially viable because the costs exceed market value, leading to total loss. In such cases, as a rule, compensation for an asset written off as a total loss will match its replacement value while new, minus depreciation for wear and tear. So, indemnity amounts will not cover the acquisition of a new, replacement asset. To overcome that limitation, an insured can sign up for a New Replacement Value Clause.
Beyond the effects on the price of consumer goods and services, other collateral damage comes into play: significant delays to production, distribution and delivery of material and equipment, delays to building renovation, to replacement, repair and assembly of plant and equipment. When a claim arises, such delays could stop operations altogether and cause business loss and/or declining sales.
This deteriorated context in logistics means that now more than ever one must acquire coverage for business interruption.
In this respect, businesses should ask for a leeway clause covering fluctuations in at-risk capital versus insured capital and, additionally, the insured would do well to undertake a meticulous review of compensation periods outlined in their insurance policies to guarantee that the timeframe necessary to rebuild, repair or replace damaged assets takes into account the greatest delays owed to current difficulties in supply chains and is duly covered in their policy. The same goes for the insured amounts.
As for civil liability policies, we now see rising claims costs as a result of higher compensation for third parties. So, repairing damage is inevitably affected by this upward climb.
Such an environment, added to growing appetite for litigation, a broadening scope for civil liability, plus the tendency to award higher indemnity amounts, means we would advise reviewed and updated contracted capital so that this capital matches exposure and liability, in as much as that capital is the maximum value for which an insurer is liable. If damage and losses exceed that amount, the insured will be liable for the remainder.