What is under-insurance? — Understanding Insurance

Under-insurance

– A risk you can avoid

Global challenges like supply chain blockages, the war in Ukraine and climate change are having wide-ranging impacts on our lives and economy. The insurance industry is not immune to these challenges and home insurance is something to think about in the current climate.

When calculating your premium, an insurer does a risk assessment to work out the likelihood of future losses. In the case of home insurance, the costs of repairs and materials are some of the factors taken into consideration. With rising inflation resulting in higher costs for materials, energy, labour and other areas, consumers could be at risk of under-insurance on their homes.

What is under—insurance?

Under-insurance takes place where you insure your property for less than it would cost to rebuild it or replace the contents.

An example of under-insurance would be if your home is completely destroyed in a storm and it is insured for €300,000, but the full rebuild cost because of inflationary factors is actually €350,000.

You would be under-insured by €50,000 and your claim at the time of loss would be €300,000, rather than the rebuild cost of €350,000.

The shortfall can also happen in cases of partial damage or loss of contents. This is because insurance policies generally contain an “average clause”, which bases the pay-out on the proportion of the value covered.

How much of a problem is this?

According to the Central Bank, an average of 16.5% of paid claims were under-insured in 2021 compared to 6.5% in 2017, and rising inflation increases the risk of consumers being impacted.

In many cases, consumers may not be aware of under-insurance as an issue. Others might be leading busy lives and not get around to reviewing their policy to make sure they’re adequately covered. Others might simply have other priorities.

In any case, doing nothing is a risk you might regret, and one you can avoid. It could end up being very costly if you have to make a claim.

Who is responsible for determining how much to insure my home for?

The amount you insure your home and contents for is known as the ‘sum insured’. You are responsible for setting the sum insured.

What factors to I need to consider when I insure my home?

Insurers are writing to their customers to raise awareness about this issue. There are some practical steps you can take now as a consumer:

Firstly it’s important to understand that home insurance can include two categories covering your building(s) and the contents therein.
To avoid being under-insured on your building(s), you should insure your home for its full rebuild cost. This is the cost of rebuilding your house completely if it is destroyed. It is not the market value, which is the price of your house if you put it up for sale today and it is not the price you paid for it when you purchased it. This includes the cost of removing debris, professional fees like architects or surveyors, and any additional costs necessary to meet current building regulations.
Your property includes any domestic outbuildings, like sheds or workshops, for example, so it’s important to take them into consideration.
On contents, consider how much it would cost to replace them as new if they were destroyed. Include everything you would normally take with you if you sold or moved out of your home.
Your policy should allow for the possibility of future price increases whether due to inflation or other matters like a new extension, for example.

How do I account for inflation and other price changes?

It’s vital that you review your policy regularly and speak with your insurance provider to ensure you have sufficient cover.

Many home insurance policies are index-linked, which means that where appropriate, and in line with terms and conditions, your policy will be adjusted at renewal to take account of inflation.

Index-linking is not specific to your property, however, and regardless these issues can be difficult to predict.

As a result, it may not be enough to rely on index-linking alone to protect yourself from under-insurance especially if you have made changes, additions or upgrades to your home.

What steps should I take now?

You should review and discuss these issues with your insurer or broker at least annually to make sure you have the level of cover you need.

Review your sums insured and update your policy if, during the policy term, you have made changes, additions or upgrades to your home.

To help you determine how much to insure your property for, the Society of Chartered Surveyors Ireland have a house rebuild calculator, which might be useful, and they also provide information on how to find an expert should you wish to get your home surveyed by a local chartered quantity surveyor.

You could also work with a property valuer, however, they will also include the price of the site as standard, which would inflate things from an insurance perspective, so you would need to clarify this with them first.

On contents, an easy way to work out the value of your possessions is to go from room to room and add up how much it would cost to replace every item as new. Another tip is to keep receipts for valuable items along with matching photographs.

If you have let your policy automatically renew for a number of years, it’s probably time to review it to make sure you still have the right level of cover.

Times to review your cover are not only restricted to times of inflation. If you have renovated your home, for example, there will likely be impacts on rebuild costs or the value of contents.

All in all, the strong advice is to act now to reduce the risk of under-insurance.