Tuesday 10 September 2024 - Thought Leadership

Brokers and Insurers Must Collaborate to Close the UK’s Property Underinsurance Gap

By Stuart Heath

 Earlier this summer, I wrote an article for Insurance Age, on underinsurance. The impact of inflation means that this is one of one of the largest threats to UK homeowners, yet it is barely recognised outside of insurance. Brokers can change this. They play a crucial role here in mitigating the risk of insuring assets for incorrect values or setting inadequate cover limits by offering invaluable assistance to homeowners. 

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For many, homeownership serves multiple purposes. It is where you build a life and family, it provides a sense of financial security and is more than likely considered an investment. While it is common to hear people engage in conversations around the market value of their property, they seem to overlook an equally important metric, its insured value. This represents rebuild costs following a weather-related disaster or freak accident and includes the price of materials, labour and additional expenses such as permits and associated fees. With the scale and intensity of weather-related disasters exacerbated by climate change, the insurance market value of properties in the UK has significantly diverged from what is accepted as the market value. 

This is expected to worsen over the next five years with claims inflation projected to reach between 8-11%. Data from the Association of British Insurers reveals that insurers paid out £1.4 billion in claims in the second quarter of the year to help homeowners cope with unexpected and unwanted events like fire and flooding. This represents a quarterly record since the ABI started collecting the data in 2017 - and a 5% increase on Q1 2024 when payouts reached £1.3 billion. However, with 82% of residential properties currently underinsured, it is likely that these payouts were unable to fully cover the cost of damages and repair.  

Brokers are essential to educating customers on how, just like market value, insurance value is not static, but influenced by economic conditions, and have therefore been on the rise due to increasing costs throughout the supply chain, particularly construction materials. 

Between 2020 - 2025, the UK Construction Materials Price Index (CMPI) is projected to grow at a compound annual rate of 6.2%, equating to a 39.6-point absolute change. This growth has been exacerbated by pandemic-induced supply chain disruptions and have led to double-digit price inflation. 

Although insurers offer more than a financial safeguard and are committed to protecting consumers from exorbitant premiums, for insurance to serve its purpose effectively, the coverage must align with the specific needs of the policyholders.

This is also why brokers are fundamental intermediaries. Their proximity to customers enables them to encourage and facilitate regular reviews of insurance policies to ensure that coverage amounts keep pace with the rising costs, while also developing tailored insurance policies for each homeowner. 

Though the UK economy is showing signs of life, expanding 0.6% in the second quarter,  the underinsurance gap shows little sign of abating as inflationary pressures continue to impact all parts of the economy and supply chain. Insurance brokers are well-positioned to collaborate with insurers to achieve the best, most suitable solutions for their customers, mitigate the risk of financial hardship and protect peoples’ most valuable asset – their home.