One of the main reasons inflation causes underinsurance is that it erodes the value of money.

As the cost of living increases, the prices of goods and services rise accordingly.

For example: the cost of rebuilding a property after a disaster, such as a fire or a natural disaster, is likely to be much higher in an inflationary environment. If the insurance coverage for the property is based on its value at the time of purchase or a previous valuation, it may not be enough to cover the increased rebuilding costs due to inflation. This results in a gap between the insurance payout and the actual cost of rebuilding, leaving the policyholder underinsured.

Similarly, inflation can also affect the replacement value of assets. For instance, the value of machinery, equipment, or inventory for a business may increase over time due to inflation. If the insurance coverage is not adjusted regularly to reflect these higher replacement values, the policyholder may not receive adequate compensation in the event of a loss. This can have a severe financial impact on businesses, as they may struggle to replace their assets or recover their operations without sufficient insurance coverage.

Regular valuations are crucial in mitigating the risk of underinsurance caused by inflation

Valuations involve assessing the current value of assets, properties, or other insurable items. By conducting regular valuations, policyholders can ensure that their insurance coverage accurately reflects the current replacement or rebuilding costs in an inflationary environment.

  • For properties, regular valuations can help determine the appropriate coverage amount based on the current construction costs and property values. It takes into account factors such as labour costs, material prices, and other market trends. By updating the coverage amount to reflect the current replacement value, property owners can avoid being underinsured in case of a loss.
  • Similarly, businesses should regularly evaluate the value of their assets, such as equipment, inventory, and intellectual property. This assessment helps ensure that the insurance coverage is sufficient to replace these assets at their current market value. By accounting for inflation and periodically adjusting the coverage amount, businesses can mitigate the risk of being underinsured and better protect their operations.

You are responsible for the accuracy and completeness of all the information you provide to us and your insurer. As always, we are here to help if you need to contact us or have any questions relating to your insurance arrangements.