Under-insurance affects the entire personal lines insurance market but is particularly pertinent to the high net-worth niche. According to figures from the Association of British Insurers, of the £950bn’s worth of possessions owned by British households, assets to the value of £266bn could be uninsured.
At its simplest, under-insurance means that policyholders who believe themselves to be fully protected are, in fact, only partially protected against the risks to which they are exposed, even though they have bought insurance protection.
Affluent individuals are particularly susceptible to under-insurance. It leads to very difficult conversations when a claim is made and, ultimately, drives a wedge between the policyholder and the insurance professionals advising them. This is why Chubb goes to great lengths to identify and remedy instances of under-insurance.
There’s never a good time for a policyholder to find out they’re under-insured, but the worst is in the aftermath of a loss. According to Steve Walters, Chubb’s UK & Ireland Property Claims Manager, under-insurance leads to some very difficult conversations in the wake of a claim: “Usually this is a time when the policyholder is feeling distressed and vulnerable. If under-insurance becomes an issue during negotiations on this claim, that doesn’t help at all.”
At Chubb, we tend to encounter cases of under-insurance in one of three ways: either when a broker approaches us with new business, or when we review a policy at renewal, or during the appraisal stage when we’re assessing the sums insured. The causes divide into two main camps, as well. In some cases, the level of cover bought at the policy’s inception was incorrect; in others, the insured’s assets have significantly changed in value since the last review took place.
Critically, standard insurance products tend not to include any form of physical appraisal of either the property or its contents. This is hugely problematic for an affluent client. For example, according to senior high net worth underwriter, Ross Pole, a client’s clothing, carpets and linens alone could well be worth over £100,000. A standard product purchased online would struggle to capture this level of granularity, but the information is critical to the valuation of the risk.
Even if an appraisal has taken place, values will continue to change over time. If the length of time between policy reviews is too long, the agreed values will no longer reflect current prices. To address this, Chubb recommends to its policyholders that detailed reviews take place at least every three years. But not every insurer gives this advice. We frequently encounter cases in which timely reviews have not taken place. The issue this creates is that asset values, particularly collectibles, change rapidly. The challenge of keeping track of these values is further multiplied when one realises that a typical affluent client’s property may contain 15–20 works of art.
Examples of rapid price fluctuations are numerous. The devaluation of sterling after the decision to leave the EU immediately increased the value of Rolex watches by 10%. Similarly, such was the demand for Ferrari’s limited edition F12 TDF, the car, which had a list price of £300,000, actually rose in value to £700,000–£900,000 the instant it was driven off the forecourt.
Of course, it’s not just a one-way street. Values can fall as well as rise, such as those of so-called ‘brown furniture’ over recent years, in which collectors have lost interest. As trusted advisers, it’s equally important for us to ensure that clients are not paying too much for their insurance.
One of the most effective ways to tackle under-insurance is a thorough physical appraisal of the property and contents, when possible in the company of the policyholder and their broker. This is the cornerstone of Chubb’s high net-worth proposition. While some other insurers make reference to their appraisals, these can be little more than paper-based exercises or what are known in the industry as ‘drive-by appraisals’ – a brief cursory inspection of the property’s exterior. Clearly, this is of very limited value.
According to Property Claims Manager Steve Walters, the appraisal lays the foundations for the relationship with the policyholder and is the basis on which agreed values for particular assets can be determined. It also provides important insights that simply are not available to the reader of a proposal form.
Insurance is a three-way partnership: insurer, broker and client. So, it will come as no surprise that beating under-insurance is the responsibility of all three parties. For the broker, it means understanding what’s insured and the level of cover in place. For the client, it means notifying us of new purchases and ensuring that the sums insured are accurate. For us at Chubb, our responsibility is to use our expertise to provide the help and advice necessary to protect our policyholders’ lifestyles.