The risks of under-insurance
by Julie Pringle, BrokerWeb Risk Services
Under-insurance is a significant risk that many do not realise they face until it is too late; those unaware of the problem will only find out when they lodge a claim. Farmers are especially vulnerable, and if their farming property is both the family home and their livelihood, as is the case for most, they can suffer more acutely than others.
Events in the last few years have had a significant impact on New Zealand and the insurance industry. Ongoing severe weather and Covid-19 have been the biggest drivers of insurance claims inflation, due to an increase in the number of claims and higher repair and replacement costs across the board.
A major adverse impact of Covid-19 for the construction sector is rising labour costs due to staff shortages, and increases in materials costs because of supply chain issues. We see similar challenges in motor and contents, which is also increasing the average cost of claims.
When reviewing the sums insured for farm buildings and dwellings, it is important to consider how the replacement costs would look in today’s construction market. With New Zealand’s largest timber supplier, Carter Holt Harvey, announcing they’ve cut timber supply to three major building supply chains, and the price of steel rapidly increasing, resulting in an average 15 per cent increase passing on to consumers, the cost to build is escalating. Making sure the replacement sums insured align with realistic, estimated build costs for all farm buildings is a key factor to consider when insuring your farm.
When you set the sum insured at the beginning of your insurance year, you need to make sure that the sum insured – the maximum you will be paid – you select for your home/farm and all other buildings is adequate to cover the rebuilding costs in the future. For instance, if a fire destroyed your home on the last day of the policy, or 364 days from now, is the sum insured adequate to cover the costs to rebuild in a year’s time? Particularly bearing in mind the increase in building materials, labour and consents throughout the term of the re-build, considering that some rebuilds can take months and years. There are specialists and specialist resources available, who can assist setting the correct sum insured.
Under-insurance is easily remedied; usually it costs less than might be imagined. For example, to increase the sum insured by $100,000 where a property is currently insured for $950,000 could cost less than $20 in extra premium, though every property will vary, depending on a number of factors.
An insurance broker is an insurance and risk management specialist. Brokers work with multiple insurers, though act on behalf of their clients, providing advice and advocacy. A broker will help identify individual and business risks, and how best to manage them, and the most cost effective way to insure.