The UK inflation rate hit 9.9% in September 2022 and is predicted to reach 18% in 2023.(1) The cost of living crisis is seldom out of the headlines and the ramifications of the war in Ukraine, global supply issues and shortages of key raw materials and components, including semi-conductors, are being felt across most industrial sectors.
In a survey, 78% of SMEs said they see the cost of living crisis as their greatest threat (2) but how many have actually considered what it means for their insurance protection?
Consumers in general offer some indication of the attitude towards insurance, with seven-in-ten retail consumers (globally) suggesting they will cut back on insurance.(3) The temptation could be to forego some covers, reduce cover limits and deliberately underestimate sums insured.
Whilst this creates greater exposures at any time, it is a particularly dangerous strategy during a time of rampant inflation. Even as things stand, many types of business should be reviewing their policies’ sums insured and considering whether to increase them, not decrease them.
This is particularly true for any construction-sector business. Between May 2021 and May 2022, the All Work construction material price index rose by 27.2%.(4) The value of contracts underwritten by Construction All Risks and Erection All Risks policies is particularly affected and insureds could find themselves underinsured, unless they review their cover.
The motor sector should also be cautious. With pressures on the supply of new cars, due to chip shortages and production downtime globally, the price of used vehicles has risen significantly. Any garages holding stocks of used vehicles should ensure their sums insured are sufficient and would stand up to scrutiny, in the event of a claim.
The ramifications of being underinsured are profound, putting a business at risk of having a claim completely turned down, with cover cancelled, or only being paid out partially, in a ratio linked to the degree of underinsurance.
Other alarm bells are sounding too. Motor claims costs are rising significantly due to inflationary pressures on spare parts, so a rise in premiums is anticipated. (5) Higher interest rates, accompanying the current inflation levels, have put pressure on property market companies, with an increase in insolvencies in this sector. Experts believe we could see an increase in Professional Indemnity claims against accountants and contract administrators who overlooked the potential signs of insolvency of their property clients. (6)
Inflationary pressures on raw material costs and supply chain issues will also bring project delays and business interruption. Companies must check that they are insured for such disruption and able to absorb delays. Having trade credit insurance, to safeguard against supplier insolvency, is also something to consider.
The domino effect of global forces impacting on businesses throughout the economy is something of which all businesses should be aware. Quite simply, now is not the time to reduce insurance covers or give insurers reason to believe that sums insured are not adequate.