The high risks of HNW underinsurance

We’re living through a difficult period in our country’s economic history. The cost-of-living crisis comes at a time when we’re still dealing with the lasting effects of Covid-19, Brexit and the ongoing war in Ukraine. Then, last week we had a mini-budget with a major impact, and shortly after there were dramatic falls in the pound, a nervous response from mortgage lenders and an urgent intervention from the Bank of England.

At the same time we’re seeing inflation rising, the values of collectables, jewellery, watches and art are increasing rapidly. So, how can we look to mitigate the stark reality of underinsurance in today’s market and what you can do to protect yourself.

What is underinsurance and what is the risk?

The reality is underinsurance isn’t a new topic, but the continuing impact of the current economic situation means that a sum insured which was calculated a year ago has the potential to be inadequate at renewal, even when accounting for traditional price indexing methods.

Insuring your contents and valuables for the correct value is a key factor in leading to a claim being paid in full in the event of a loss. If there was a total loss, where the total sum insured is inadequate, then this sum is the maximum the insurer is likely to pay, even if the sum insured is significantly less than the actual cost of replacing the clients assets.

Furthermore, partial loss claims are also likely to be subject to the application of ‘average’ based upon a proportionate reduction in line with the actual value at risk. Even more concerning, is that if the setting of the sum insured was found to be reckless or a deliberate attempt to reduce the premium, and insurers can evidence that had they known the true value then cover would not have been offered, the policy could be voided from inception. This amplifies the importance of understanding the significant impact to a customer if a risk isn’t presented correctly.

For example, if the contents and valuables were insured for £600,000, but the full value at risk was found to be £1,000,000 (thus 40% under insured) a £60,000 claim would be adjusted as follows:

Sum Insured £600,000
Value at Risk £1,000,000
Claim £60,000
Amount Paid £36,000

Faced with the complexity of insurance policy contracts, individuals and families with substantial assets are often reluctant to think about the risks of loss, theft or burglary, and leave their insurance relatively unchanged year after year.

Contents including fine arts and antiques

Often an emotive issue at the time of a claim, given you may be facing a sentimental loss in addition to financial loss. If you are not adequately insured this is then made even more difficult. Using specialists to calculate the current value of the building, contents, jewellery, artwork and antiques is a helpful process in improving the accuracy of valuations, especially in the current climate where currency and share trading are highly speculative and changeable.

At these times, investment in ‘safe’ items increases but the value needs to be accurately established as this raised demand can also bring large increments in value. You will improve your chances of a more comprehensive settlement if all items are correctly considered. One method that helps is for each room to be logged and all items within each room itemised. It is helpful to include understanding of what you think would be covered in a claim, for example carpets and soft furnishings, especially in the high-net-worth market where curtains and carpets can be of very high value, but are often overlooked, when focus is drawn to personal possessions.

Specified Items

If a specified item is not adequately insured, then you would only ever receive the maximum settlement of the amount set against that item. Underinsurance in this instance could lead to a significant shortfall, devastating and often due to a lack of appreciation as to the current value of the item. Once the basis of a valuation has been formed, it is helpful that other items such antiques, high value jewellery and artwork be inspected by a specialist and a valuation provided.

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