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Coinsurance in 2024

Coinsurance concept. Stack of insurance documents on desk.

Navigating the Australian commercial property insurance landscape has become increasingly challenging due to a concerning trend: the rise in under-insurance (often confusingly termed “coinsurance”). Underinsurance can arise from undervaluing assets at risk and underestimating the loss of profits.    This commonly happens when a business is unable to trade due to an insured event and miscalculates the time needed to reinstate its assets.  These challenges are intertwined with shifts in insurance market dynamics, particularly impacting claims and risk management strategies.

A number of factors have contributed to under-insurance.  The first of these is the increased cost of living in Australia. Inflation drives up the prices of construction materials and labour which in turn increases the replacement value of properties. This, consequently, can cause insurance buyers to underestimate the true value of assets and leave businesses inadequately covered in the event of a claim.

Supply chain disruptions, including those caused by the COVID-19 pandemic and geopolitical conflicts like the ones we are seeing with Russia-Ukraine and Israel-Palestine, have only exacerbated inflation.   Particularly for certain items of technology or things like high end building materials and fittings imported from overseas. 

Unfortunately for insurance buyers the above inflationary pressures have coincided with a hard market driven by a combination of a sustained period of downward pressure on premiums, adverse portfolio performance and increased cost of reinsurance.   In turn, the tighter insurance market, has meant not only increased premiums but more stringent risk assessment criteria. Rising premiums encourage some businesses to underinsure their properties in an attempt to contain immediate financial pressures.

Coinsurance in commercial property policies can have significant adverse implications for policyholders.  Principal amongst these is a reduction in claims payments.  Co-insurance clauses penalize policyholders if the declared insured value falls below a certain percentage of the property’s actual value, leading to diminished claim amounts.  These clauses operate to encourage policyholders to pay the appropriate premium for the assets they are insuring. 

In turn, inadequate coverage can leave property owners liable for additional expenses during reconstruction, such as increased building costs, debris removal, and compliance with updated regulations which fall outside of the policy.   This increased, unanticipated financial burden is likely to add unnecessary stress after what is already an unwelcome insured event. 

Coinsurance can also disrupt business operations by affecting cash flow and a business’s continuity. It may also impact tenants and the associated rental income streams, creating further financial strain.  A number of numerous BI policies do not allow any tolerance for the BI calculation which exacerbates the issue can leave an insured without adequate insurance for substantial business losses.

Mitigating Coinsurance:

Addressing the challenge of coinsurance in commercial property policies requires proactive steps, including:

Regular Valuations: Property owners should conduct periodic valuations to ensure that the insured value accurately represents the property’s replacement cost. Valuations should consider rising construction costs and other associated expenses.

Engaging with Experts: Collaborating with seasoned insurance advisors provides insights into industry-specific risks, aiding in tailoring coverage to mitigate potential coinsurance risks.

Strategic Risk Management: Robust risk management strategies should identify vulnerabilities and address them pre-emptively. Exploring innovative insurance solutions like captives and protected cell companies can offer alternative risk-transfer avenues.

Comprehensive Policy Review: Businesses, in conjunction with their insurance broker, need to perform comprehensive reviews of their insurance policies to ensure they provide adequate coverage, considering potential inflationary impacts and evolving market conditions.

The impact on claims

We have seen a huge uptick in underinsured policies over the past 12 months.  The last thing we want to do is impose co-insurance penalties but insurers should not be expected to pay the full value of claims when they have not received the premium commensurate with the values at risk.   These claims demand a strategic approach to ensure fair and accurate claim settlements while minimizing financial setbacks for insured businesses. Here are some key guidelines our Property team strive to adhere to when tackling the issue of coinsurance:

  1. Collaborate with quantity surveyors or valuation experts to determine the accurate replacement cost.
  2. Maintain clear and transparent communication with policyholders and brokers throughout the claims process. Explain the co-insurance implications as early as possible, guiding them through the assessment and ensuring a shared understanding of potential claim settlements.
  3. Emphasize the importance of comprehensive documentation and other evidence to support the claim. Gather invoices, valuations, and any relevant records that validate the property’s value and the incurred loss.
  4. Ensure accurate calculations of the co-insurance clause’s impact on claim settlements.
  5. Provide guidance to insured parties on avoiding future coinsurance.
  6.  Stay updated on industry trends, regulatory changes, and market dynamics influencing property valuations and insurance. Continuous learning equips claims handlers to navigate complex coinsurance scenarios more effectively.
  7. Proclaim holds Reserve Committees which also discuss policy response and claim strategies on all large losses.  The goal of these committees is to present, discuss and agree upon the most fair and reasonable response to these large claims and set claim strategy – including when co-insurance may apply.

If have any questions or wish to discuss this ever evolving issue in our industry, please reach out to one of the Proclaim Property team and we’d be happy to discuss further.

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