Should Co-Insurance be deleted on Business Insurance (Property and BI)?
I was honoured to take part on a panel session at the Insight Insurance Brokers Association Inc over the weekend which was held in Glenelg, South Australia.
A question came up that is one of the most common asked of me. That is: Is it not time that co-insurance (the penalty for a person being under insured) be removed from business insurance.
I expressed my long standing position on this and that is that it should not be removed. It may assist Insured’s (and their brokers from a professional indemnity claim) in minor claims but in my experience it leads to major problems in the event of a larger claim.
We saw this in New Zealand after the Christchurch Earthquakes. In New Zealand with a combination of high fire service levies and the opportunity to buy what is known as “First Loss” cover many insureds selected a sum insured on their building, stock and or other contents based on what they considered to be the maximum probable loss that they would ever sustain. Most insureds make the false assumption that bricks and concrete do not burn. They therefore exclude the foundations and slab floors from their sum insured. Having gone to buildings after major fire for over 40 years I know this is false logic.
When the earthquake occurred many buildings were totally destroyed and sums insured proved completely inadequate to rebuild. This has a very bad effect on the Insured business and its owners; it potentially opens the broker up to a large professional indemnity claim, and is bad for financiers as well as the local and national economies.
It is not just earthquake. I saw the same after the Victorian bush fires and in most major natural disasters going back to Cyclone Tracey in 1974.
Insurers do their bit to assist by a) giving the insured anywhere between 15% and 20% tolerance for being under insured, b) not applying co-insurance to claims under 5% or 10% depending on the policy wording, c) in the case of some insurers offering seasonal increase on stock and or a 20% uplift on the sum insured on the building following a named disaster and d) are prepared to waive co-insurance if the assets are valued by an approved valuer and on business interruption if the insured has a financial valuation by a firm such as LMI Group.
LMI Group have done what we can by providing a free iPhone /iPad app that allows you to work out and understand the penalty for under insurance. It also provides a building cost estimater to assist in knowing if you should obtain a proper valuation.
At the end of the day, insurance should be there to pick up all the pieces after a loss. Unless an insured is fully insured there is a massive risk.
I could go on about the difficulties of rating first loss covers and the fact that reinsurers would not support it but at the end of the day, these are secondary. It is the Insured that needs to be protected. If he wants to accept part of the risk him or herself then they need to understand they do this on each and every claim and not just the total losses. It is only fair and reasonable to do so.
To me, much more important than removing co-insurance is to the removal of all insurance taxes that encourage/force home and business owners to be under insured.