Lockdown Brings Underinsurance into Focus but Data Can Add Much Needed Resilience

Underinsurance, when your insurance cover, or sum insured, is less than the value at risk has been put under the spotlight during the pandemic.

Home insurance in particular can be a confusing purchase. When you consider that price comparison sites have an average of 70 questions before providing a quote, and direct insurers have around 40 different questions, it’s not just confusing, but it’s time-consuming too.

Many of the questions assume a level of knowledge consumers just don’t have about their home such as the cost to rebuild it, details of various locks, flood resilience measures, or building construction type. We have commented in another blog about this disconnect in the market and why on average in the UK, one in every five home insurance claims are rejected in some way.

The drive to use property data, to be able to benchmark properties of a certain size, geo-location or risk category is an interesting conversation that we’ve been having with clients, around the design and uses for the Property Insights dataset.

In the insurance industry, there’s a common view that as we come out of the pandemic – and especially in the light of the regulator’s Treating Customers Fairly principles – there could be an uncovering of a multitude of business and potential insurance issues.

In commercial property and SME insurance, the list of issues that we can group under the heading of underinsurance is even longer, whether deliberate or unwitting underinsurance.

By underinsuring, I’m referring to the two categories. First and most commonly the consumer unintentionally insures, by just mistakenly underinsuring or not realising the the value or cost of something, for example providing an inaccurate total for the sum insured for buildings or contents. Secondly, the customer may buy deliberately reduced limits, or all around coverage that ignores some of the risks. For an SME this means typically buying fewer lines of business insurance, overlooking cyber risk for example, business interruption, keyworker or director risk. None of these situations are likely to end in a great customer outcome.

Customer disconnects and causes of underinsurance

The Financial Ombudsman Service deals with over 100,000 consumer queries per quarter about a range of issues, and it filed almost 73,000 complaints for the last quarter. Complaints from the SME sector, complaints related to loans or consumer credit and underinsurance complaints (especially related to business protection complaints) are some of the persistent areas of consumer dissatisfaction and disconnect.

In relation to underinsurance, the bulk of consumer complaints the Ombudsman handles are where:

• the insurer has tried to apply ‘average’ to a claim when there is no average clause in the policy
• the insurer didn’t make it clear that the customer needed to check the accuracy of all pre-filled parts of an online form about the sum insured
• the insurer applied the average clause, although they didn’t ask the customer to give an estimate of the full amount at risk.
• the customer was careless in stating the sum insured on their application form, so the value isn’t accurate, but still seeks to claim

Before offering cover, the insurance provider needs to know as much as possible about the replacement cost of the contents of a property, the cost of rebuilding the property, or both. This is so they can assess the risk they’re taking on before giving a quote. But consumers aren’t usually experienced in calculating these costs. Therefore benchmarking property and risk data has potential when it can enriched at point-of-quote alongside other contributory databases, insurance shopping trends and consumer behaviour.

Tackling the growing twin problems of underinsurance and helping insurance providers get the right cover in place is key to our agenda at LexisNexis Risk Solutions in terms of how we help the industry to apply property data and commercial data.

It’s good to remind ourselves of the foundational principles of insurance, to help protect people and businesses against unforeseen shocks by rating the insurance coverage they need to manage the actual risk. In the process, insurance helps to preserve assets and jobs.

There’s no doubt the pandemic has not helped when it comes to this issue, and the allied problem of the disconnect that can occur at point-of-quote, of the customer not buying the right insurance. Understandably, the pandemic and the resulting hit to the economy has forced businesses in particular to look carefully at every cost, to make savings to survive. Insurance we know is no exception to this cost-cutting exercise and there’s a need to use data to strengthen this customer relationship when it comes to measuring resilience.

At the same time, the insurance market overall has rapidly hardened with COVID-19 acting as an accelerant to this trend. In the broker market, recent statements from BIBA have warned against this double-whammy: the increasing cost of insurance twinned with the need to save money which will worsen the problem of underinsurance.

Clearly, looking at the data and from the point of view of the industry we see this as a false economy. At a time when a businesses and people are financially stressed, the last thing we should contemplate is shedding important insurance cover, because that means understating the value of assets, reducing limits, or dropping important covers.

The pandemic has also exacerbated the persistent problem of getting proper current valuations of assets. Research by BIBA indicates the last time an SME took an insurance valuation is on average two and a half years ago. We can imagine that the delays and business hardship due to the pandemic will cause this gap to widen. From our conversations with clients, along with feedback from loss adjusters, it seems that a large proportion of policy holders are now uninsured.

Underinsurance and factors in business resilience

The pandemic has also forced a change in the nature of the business operations. This is closely linked to the problem of underinsurance as well as the problem of not having the right insurance.

COVID-19 forced many businesses to rethink their business model and how they operate in a COVID world. For example, many were forced to build an online presence to combat the drop in physical footfall. Technology helped to achieve this shift, and it has resulted in a change to the type of cover that’s appropriate. Business interruption insurance, based on the increased cost of working, was for example more suitable for some companies than just covering gross profit. Similarly, cyber threats have overtaken physical threats for a lot of businesses.

Again, research by BIBA indicates that although two thirds of businesses have adapted their business model as a result of lockdown, 90% have not made any changes to their insurance coverage. This creates a real risk of claims being reduced or declined if the business fails to notify its insurance provider of its changed business operations.

Finally, there’s a temptation that because turnover has radically declined during the pandemic, the estimates for the coming year may be significantly understated. This is something to check for any business owner or manager out there.

To sum up, what I’ve described is a perennial challenge for the industry but it’s been made worse due to the pervading circumstances of the pandemic: homes and businesses are currently running a real risk of having insufficient or inappropriate insurance. The role of trustworthy data and data down to the granular detail, has never been more important in helping customers buy appropriate and sufficient insurance.

Follow the link to the LexisNexis Risk Solutions website to find out more about how we support insurance providers.