The Importance of Sums Insured

An article for broker and insurance intermediaries. 

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Your customer’s home is one of the most valuable assets they are likely to own. You, as their insurance expert have an opportunity to provide a great service by explaining the importance of the sums insured and the implications if they are not accurate at the time of a loss.

Why are the sums insured so important?

The sums insureds are one of the main factors in how the premium is calculated. If at the time of a loss, they are not adequate the customer will be are deemed to be ‘underinsured’ and the principle of ‘average’ will be applied to their claim. This is where the claim payment is proportionately reduced by the percentage of under payment of premium.

Case Study

Property insured for £290,700 but correct building sum insured is £2,140,000 so only 13.58% adequately insured at the time of loss. Property is a 5 bed, 1800, listed structure. 

Claim value was £17,686 but due to under insurance claim settled at only £2,419.

Buildings – Reminders/Pointers

  • Building sum insured – Needs to be the full value cost of rebuilding the property by a professional third-party contractor. This includes rebuilding expenses such as architects & surveyor fees, clearing the site of debris, complying with local building regulations etc.
  • Outbuildings, Walls, Fences, Driveways, Paths etc. also need to be included in the building sum insured.
  • The policy wording will contain a definition for buildings which explains the things which need to be considered by the customer.
  • Does the sum insured seem adequate for the size of property? Consider the number of bedrooms for example. Please don’t hesitate to query with the customer.
  • NOTE: The rebuild cost of the home is not the same as the market value. Please ensure you make the customer aware of this common misconception.

 Contents – Reminders/Pointers

  • As a general rule of thumb if you were to turn the property upside down anything that isn’t fixed would be classed as contents.
  • For general contents and personal possessions, the figure must be the cost to replace as new.
  • For valuables the figure must reflect the current market value.
  • The policy wording will contain a definition for contents which explains the type of items which need to be considered.
  • Does the general contents sum seem in proportion with valuables? Consider the client’s lifestyle.

Indexation

As a means to protect the customer against underinsurance when their policy falls due for renewal, we will index link the buildings and contents sums insured using market wide indices designed to keep up with inflation. Whilst this does have an impact on the premium, this is only one factor. If the customer queries the reasoning behind index linking you should it explain that it is designed to protect them and is not the insurer just simply looking to make a profit. If you do wish to discuss the premium on behalf of the customer, please contact our underwriting team.

Since Brexit and COVID-19 the cost of inflation continues to rise so relying on index linking alone is not an appropriate substitute for the customer to not regularly review their sums insured to keep up with market trends. They can update their sums at any point throughout the duration of the policy.

What to do if the customer is unsure about their sum insured

Buildings - The most accurate way to calculate this figure is to have a rebuild cost assessment carried out by a qualified RICS (Royal Institute of Chartered Surveyors) surveyor. It may also be possible for the survey to be carried out remotely which is known as a desktop survey. For any survey however the surveyor should be a member of RICS and have professional indemnity insurance.

We do not recommend the use of online calculators as they can provide a generalised figure that may not be appropriate for your customer’s specific property, particularly if it has any unusual features.

Contents – The customer may find it helpful to create an inventory of their contents, including contents in the garden and outbuildings which should be reviewed on a regular basis, particularly after purchasing new items. For jewellery or fine art, guidance from a specialist valuer should be sought (it may be a requirement of the policy that valuations are conducted on a regular basis (normally every 3 years as a minimum)).

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