How to avoid the increased risk of underinsurance for plant and machinery
During tough economic times, it is vital that businesses ensure that they have accurate valuation assessments for their plant, equipment and contents to fully protect their business. Getting it wrong will be costly.
There are three key reasons why the valuation for plant, equipment and contents should be reviewed immediately:
We have seen a huge increase in inflation over recent times and although the CPI (Consumer Price Index) is high, this does not always correlate to changes in equipment and construction costs.
There has also been a fluctuation over the last few years in material costs, labour rates and contractor margins.
The reasons why this is happening is due to cost increases during 2021 being driven by production capacity constraints, low storage inventories, geopolitics and rising demand post-covid. 2022 has brought us high energy prices that have driven further significant cost increases on materials that are energy intensive such as building materials and metals.
- Exchange Rates
Changes in foreign exchange rates can have significant implications for the reinstatement values of plant and machinery as a high proportion of this equipment is either manufactured outside of the UK or constructed from components sourced abroad.
The relative value of the pound to foreign currencies can fluctuate dramatically throughout the year and on a longer-term basis. We have recently experienced all-time low exchange rates between the pound and the US Dollar, which could have a significant impact on any reinstatement costs.
Regulatory changes that require additional compliance for new installations, further requirements for noise abatement or greater building standards could have implications for uplift in any reinstatement costs or even in extreme circumstances prevent reinstatement back in the original location.
What you can do.
The most effective way to survive these constant changes is to monitor the markets to understand your exposures, assess the risks and manage any implications.
When there is high inflation and volatility there is an increased risk that existing declared values are incorrect, this will lead to underinsurance.
Reviewing your policy and analysing it correctly to achieve accurate reinstatement costs, particularly for plant and machinery will be imperative. It is also vital to reflect the appropriate cost movements if updating previously declared values or historic costs.
Don’t rely on previous assessments or an internal assessment to index for several years as this could lead you to be exposed.