Insurance checks vital as inflation hits a high

In the wake of inflation hitting 10 per cent, and the cost of living rising at its fastest rate for 40 years, millions are looking at ways to make financial savings.

Cutting corners on insurance, however, is fraught with risk and can lead to considerable financial loss.

Undervaluing insured property as a means of reducing premiums is a gamble that can come back to bite you. In the event of theft or damage, owners will not be covered for the true value of the insured asset. Any saving made on reduced insurance premiums will be eclipsed by vastly reduced claims settlements.

Underinsurance affects all claims including partial losses. Policies include an ‘Average’ clause, meaning that all claims settlements are reduced by the level of underinsurance as a direct proportion. If insurers believe that the sums insured have been set or reduced through deliberate or reckless action, they can even invalidate your policy entirely!

Equally ill-advisable is choosing to let your insurance lapse entirely. In addition to potentially suffering thousands of pounds of losses, such a decision could adversely affect your risk profile. Insurers may deem you financially irresponsible, resulting in higher premiums when starting a new insurance policy at a later date.

Sums insured on a buildings policy may have been adequate at the time of renewal, but halfway through the term, this may no longer be the case. Such a scenario will invariably occur when the price of materials soar, as has been the case in recent months.

A Day One uplift may have previously offered protection, but with the present level of inflation this may not be adequate. Under Day One Reinstatement, the maximum pay-out is the Declared Value (the Reinstatement Value) from the outset, plus the chosen Day One uplift, which is normally 15 per cent. However, this may not be sufficient when, as is the current case with steel and concrete, prices accelerate by up to 40 per cent.

Even when there is sufficient Day One inflationary protection, it is imperative that the Declared Value was adequate from the outset, or the claims settlement will still be affected by the Average reduction.

While index-linking offers inflationary protection, it does not guarantee true protection if the sum insured at the outset was inadequate. If, for example, the original sum insured was 60 per cent of the true value, index-linking year-on-year would mean the sum insured would remain 60 per cent of the true value at risk, but at today’s prices.

Index-linking is also applied as a national percentage and does not account for local considerations, such as different labour rates. Content values, meanwhile, can fluctuate considerably depending on such factors as supply and demand, the cost of parts and shipping.

Motor claims, too, have not escaped the inflationary environment, with the price of replacement parts – and cars – exceeding normal expectations as a consequence of global supply shortages.

In light of this, owners should be mindful of possible vehicle appreciation when undertaking insurance renewal reviews.

Furthermore, caution is advised when considering GAP insurance – cover for the difference in the price paid for a new car and the amount an insurer would pay if it was written off. Where cars appreciate in value, this may not be as prudent, and it is important to take professional advice.

The importance of reviewing your policies on a regular basis in the current climate cannot be understated. Do not forget that it is you, the policy holder, who is responsible for ensuring sums insured are adequate.

All too often, attempts to make short-term savings will result in long-term financial loss.

Please do chat to your usual Lycetts contact if you would like to make any amendments to your policy or if you would like to discuss your insurance requirements further.