The issue of underinsurance among commercial properties in the UK has become increasingly concerning, particularly amid rising costs and supply chain disruptions. Recent findings from a report by insurance broker Gallagher reveal that nearly half—46%—of UK commercial properties are underinsured, a situation that exposes owners to significant financial risks. According to the study, the primary driver behind this worrisome trend is the inflationary pressure that has caused a spike in the costs of both building materials and labor. Specifically, since 2020, construction material prices have surged by 36%, while labor costs have climbed by 7% over the past year alone.
Root Causes of Underinsurance
Inflationary Pressures
One of the key factors exacerbating underinsurance in UK commercial properties is the relentless rise in costs due to inflation. According to Gallagher’s research, 63% of claims managers cite material cost increases as the primary reason for underinsurance, while 50% point to escalating labor costs. Both of these factors are creating a perfect storm for property owners who struggle to maintain insurance coverage that reflects actual rebuilding expenses. Adding to these challenges are supply chain disruptions and raw material shortages, which further crank up the prices and lengthen the time required for construction projects.
The relationship between rising costs and underinsurance is further complicated by a shortage of skilled workers. This shortage has made labor more expensive and has contributed to delays in project timelines. Such increasing complexities not only make it harder for property owners to get accurate insurance but also leave them at risk of facing financial ruin if they need to make a claim. Indeed, 67% of claims managers reported reducing or rejecting claims because the insurance coverage was insufficient. This trend highlights the critical importance for commercially insured property owners to stay attuned to market changes to avoid such pitfalls.
Extended Rebuild and Repair Timelines
Another significant aspect of the underinsurance problem is the extended timelines for commercial property rebuilds and repairs. Nearly 96% of respondents in Gallagher’s study noted that the duration for these projects has increased, leading to prolonged business closures or interruptions. These extended timelines are not just logistical nightmares; they translate directly into financial strain for the businesses involved. If a business suffers from inadequate insurance coverage during such a period, the financial loss can be catastrophic.
Business interruption insurance, often considered a lifeline during such extended rebuilds, is frequently found to be insufficient. Over half—54%—of the claims managers indicated that the business interruption cover is inadequate. This inadequacy exacerbates the financial pitfalls businesses face, especially when they are already dealing with the intricacies of elongated project timelines and rising costs. It appears that many commercial property owners are either unaware of the need to update their coverage or they underestimate the amount required, leaving them vulnerable during periods of reconstruction or repair.
The Role of Property Valuations
Neglect in Regular Valuations
One of the critical but often overlooked contributors to underinsurance is the neglect in conducting regular property valuations. Gallagher’s study figures show that 37% of claims managers attribute underinsurance to property owners failing to reassess their properties’ value regularly. This lapse is particularly concerning given that reassessments are generally recommended every three years to ensure coverage aligns with current market values. Unfortunately, the oversight of this fundamental practice leads commercial property owners to face heightened financial risks during times of property damage and subsequent rebuilding processes.
Failing to perform routine valuations is akin to operating a business based on outdated financial statements—it sets the stage for significant errors and misjudgments. What makes the need for regular valuations more critical today are the unprecedented supply chain disruptions and an increased demand for raw materials and labor, both of which significantly influence property values. Regularly updated insurance based on current valuations can help mitigate numerous financial risks and uncertainties, allowing businesses to focus on their operations rather than potential looming financial disasters.
Professional Consultation
Amid the rising complexities of maintaining adequate insurance coverage, the importance of professional consultation cannot be overstated. Gallagher’s claims director, Phil Daly, underscores the value of working alongside risk management specialists to ensure that insurance policies reflect the actual needs of commercial properties. Risk management specialists bring the expertise required to navigate through the intricacies of insurance coverage, offering property owners a safety net through well-grounded advice and accurate evaluations.
Although engaging with professionals may entail additional costs, the expense is justified when weighed against the risk of financial collapse due to underinsurance. Expert guidance helps property owners continuously align their insurance coverage with the ever-changing market conditions, safeguarding business continuity in the face of unforeseen challenges. The growing trend of underinsurance signals a clear call to action for commercial property owners to reassess their strategies. By partnering with risk management specialists, they can secure a more stable and financially secure future.
Moving Forward
Consequences and Solutions
The problem of underinsurance among commercial properties in the UK has become increasingly alarming, especially with rising costs and supply chain disturbances. A recent report by insurance broker Gallagher has disclosed that nearly half—46%—of commercial properties in the UK are underinsured, putting owners at substantial financial risk. The main factor behind this troubling trend is inflation, which has significantly increased the cost of building materials and labor. Specifically, since 2020, the price of construction materials has shot up by 36%, and labor costs have seen a 7% rise over just the past year.
These inflationary pressures mean that many property owners have policies that no longer cover the true cost of rebuilding or repair. This underinsurance leaves them vulnerable in the event of damage, as their insurance will not fully cover the expenses needed for reconstruction. As a result, owners may face severe financial hardship and may be unable to restore their properties to their original condition. Addressing this issue is crucial to safeguard commercial property owners from potentially devastating financial consequences.
