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Now’s the time to update your insurance cover for Inflation
Interest rates have increased again. Although inflation has dropped recently, its impact has been to increase prices of labour, plant, machinery and building materials by 20% – 30% over the past few years.
Building and Equipment Values – Inflation-adjusted
Rising Replacement Costs: When the prices of goods and services increase, the cost of replacing damaged or lost property also increases. If your insurance coverage is based on outdated replacement values, you may have a claim settlement that does not fully repair or replace your building or machinery, leaving you out of pocket and likely delaying repairs.
Understanding Inflation and Its Impact on Insurance
Firstly, as the cost to rebuild or replace machinery, contents and buildings has increased, the sums insured (declared values) on your insurance policies should have increased.
Underinsurance occurs if the declared values are insufficient to replace or reinstate the damaged item at the time of the claim. The outcome of underinsurance is that the claim settlement may not be enough to fully repair or replace the damaged item, leaving the business out of pocket.
Have a look at the declared value/ sum insured shown on your insurance policy schedule. Are they enough to cover the full cost of rebuilding, repairing or replacing your home, commercial building or plant & equipment over the next 12 months, considering approx. 6% inflation over the next year.
If your building insurance sum insured is currently $1,000,000, destroyed in a fire, and the rebuilding cost is $1,200,000, you would contribute $200,000.
Underinsurance also applies if there is a claim for partial damage. For example, there is $400,000 in damage to a building which is covered by insurance, but the sum insured on the policy is $1,000,000.
However, the adjuster notices that the replacement value of the building (calculated at the start of the period of insurance) should have been $1,500,000.
Under-insurance applies because the declared value of the property is less than 80% of the insurable value calculated in accordance with the Basis of Settlement in the policy.
Claim payment = ($1,000,000 x $400,000) / ($1,500,000 x 80%) = $333,333.
Therefore, the insurer would pay $333,333 and you would pay the balance of repairs of $72,667.
So, it’s important to ensure your building, machinery, and contents are at the current replacement value to avoid any gaps in coverage and delays in settlement.
Tips for Managing Your Insurance Obligations in an Inflationary Environment
You can do several things to ensure that you maintain the right sum insured.
1. Review Your Policies Regularly: Businesses continually change, so ensure you have the coverage you need and keep your insurance adviser current. Whether it’s inflation-related, a new line of products or higher levels of stock.
2. Work with an Experienced Insurance Adviser: Working with an experienced insurance adviser can help you navigate the complexities of insurance in an inflationary environment. We also have contact details for registered valuers for buildings and equipment that we can provide.
3. Consider Different Insurance Options: There are many different insurance cover options available or higher excesses, or revise the mix of cover to reflect changes in your business. For example, you may want to consider a bundled insurance policy combining several types of coverage to save money.
Inflation is expected to remain high for some time, so it’s important to check and see if you have the right mix of cover, excess and premium to meet your needs.
Speak to one of our professional insurance specialists today, who can work with you to provide advice and tailor an insurance program that meets your needs.