The Driving Forces of Underinsurance in UK Property
Underinsurance is one of the most persistent and costly issues in the UK property insurance market and has been increasing in its importance since the COVID-19 pandemic. An article in Insurance Post suggests that building insurance valuations could need to be 82% higher. The rising problem of underinsurance is not going away, and in our latest blog, we will highlight the key points to ensure you have the correct insurance in place should the worst happen.
What is underinsurance – a working example.
Underinsurance occurs when the sum insured on a property insurance policy is significantly lower than the true cost to rebuild the property following a total loss. It’s not about market value — it’s about the full reinstatement cost, including demolition, professional fees, materials, labour and all elements required to return the building to its pre-loss condition.
Underinsurance does not just mean your business is not insured to the correct amount, for example: if the cost to rebuild or replace your property or contents is £200,000 but you only have cover for £100,000 you are underinsured by 50%, therefore you will be subject to what is known as ‘average’ and any claim you make will be reduced by 50%. If you are significantly underinsured, your insurer may even void your coverage altogether.
Research showed that at the start of 2022, around 80% of UK buildings were underinsured, with the average sum insured covering just 68% of the true rebuilding cost. Only around 14% were overinsured, with sums insured exceeding the correct rebuild value, but this number has also shifted with cost pressures. These figures are alarming, but they are now worse than ever before due to rising construction and materials costs.
Why has the risk of underinsurance increased?
Between January 2022 and today, the UK has seen significant increases in construction costs, typically 25% to 35% cumulatively driven by labour shortages, supply chain pressures and inflationary effects.
Inflation has been a major driving factor for underinsurance, and when you apply these cost increases to older property valuations:
- Properties previously insured for only 68% of their rebuild value now need between 85% and 98% higher cover to reflect true costs.
- Across the UK property market, the overall average increase needed in sums insured is between 68% and 82%.
This is not a small indexing adjustment; it reflects a structural misalignment between existing policies and real-world rebuilding costs.
The consequences of underinsurance
Underinsurance has a direct financial impact when a claim happens, as the claim outcome can be devastatingly low. Many policies include an “average clause”, which can lead insurers to reduce payouts proportionally to the level of underinsurance.
There is also the problem of ageing valuations, which are out of date and therefore can be misleading with studies suggesting that rebuild costs, labour costs and material prices have moved significantly in recent years. Plus, Traditional index-linking alone is often insufficient to keep up with real cost inflation.
How to safeguard against underinsurance.
Here are some practical ways to help reduce the underinsurance gap, offering protection to property owners:
- Commission regular rebuild cost assessments from qualified surveyors rather than relying on purchase price or market value.
- Update valuations regularly, especially in a volatile cost environment, rather than relying solely on annual indexation.
- Include all rebuild cost elements such as professional fees, demolition, debris removal and landscaping.
- Review your property insurance regularly with your Account Manager to ensure the policy is fit for purpose.
The issue of underinsurance for properties is here to stay, so now is the time to have a review. Contact our experienced property insurance team today on 01905 21681 or alternatively email enquiries@sutcliffeinsurance.co.uk
