Avoiding insufficient insurance coverage is crucial for inclusive growth and when it occurs, ways to address the issue abound, writes JOSEPH INOKOTONG.
Underinsurance is a term that refers to a situation where the amount of insurance coverage purchased is insufficient to cover the full value of the insured item or potential losses. It happens when a person purchases a policy that does not adequately protect them in case of an incident.
For example, if someone has a home worth N3 million but only buys N2 million worth of insurance, they are underinsured. This can leave them exposed to significant financial loss in the event of a disaster or incident that is covered by the policy.
Experts say it is important to be aware of the risks of underinsurance because it can have dire consequences. Some other examples are: If your home is underinsured, you may not be able to fully rebuild after a disaster or repair extensive damage to the property. If your car is underinsured, you may not have enough coverage to pay for repairs or replace your vehicle if it is damaged or stolen.
According to experts, there are several factors that can lead to underinsurance. A few of them are: Misunderstanding coverage: Some people misunderstand the coverage provided by their insurance policies. They may think they are fully protected when they are actually underinsured.
Cost concerns: Some people purchase the minimum amount of coverage required by law or the lowest coverage they can afford, even if it is not enough to fully protect them.
Confusion about replacement cost: Some people may not understand the difference between market value and replacement cost. As a result, they may underestimate the amount of coverage they need.
Mitigating underinsurance is crucial for inclusive growth. Here are some ways to address this issue: Education and awareness: Insurance providers, governments and consumer groups can work together to educate people about the importance of adequate insurance coverage and the risks of underinsurance.
Improved policy design: Insurance policies can be designed to better explain coverage and options to customers. This can help people make more informed decisions about their coverage needs.
Price regulation: Governments can implement price regulations to make insurance more affordable for low-income households.
Regulations and penalties can act as powerful deterrents against underinsurance. With mandatory minimum coverage, governments can set minimum coverage requirements for insurance policies. If people do not meet these requirements, they may be subject to fines or other penalties.
Market sanctions can also serve as a deterrent. Insurance providers can be fined or penalised for selling policies that do not provide adequate coverage. This can encourage them to offer better coverage options.
Increased monitoring is another potent tool that can mitigate underinsurance. Governments and insurance regulators can increase their monitoring of insurance policies and providers to ensure that customers are getting the coverage they need.
As earlier stated, Underinsurance refers to the situation in which an individual or entity has an insurance policy, but the level of coverage is insufficient to cover the cost of a potential claim. This usually arises when the insured party has not accurately assessed the value of the assets being covered or the potential liabilities they might face.
It happens when a property is insured for less than its true value. It is a common occurrence since most policyholders do not have accurate knowledge about the total value of their property. Also, many insurers do not ask specific questions regarding the total value of a property, culminating to a likely insufficiency, leading to underinsured.
Under this scenario, if the worst happens and a property suffers severe damage, the amount paid out following an insurance claim would be significantly reduced. On average, in some jurisdiction, buildings are insured for only 68 percent of the amount they should be. Underinsurance may provide a client with a slightly cheaper premium each year, but it does not cover for the value needed and the client will be responsible for the shortfall, not the insurer.
Experts say “Underinsurance is often caused when it is applied and searched for as a quick to-do. If rushed and not entered correctly, this can cause you to be underinsured. You think by filling in the supplied forms or making a phone call to answer the relevant questions, the value of your property is protected should you need to make a claim. However, the forms you supply and the questions you answer are typically pre-filled and the guidance is based on averages.”
As an example, if the contents value of a domestic property is set at N100,000 based on the average, you may think this is enough without giving the valuation any further thought. The insurance provider may ask something like, ‘Is the total sum of your contents worth less than N100,000?’ You may give it a quick thought without any thorough evaluation of the replacement cost should you need to make a claim. The accuracy of your insurance coverage is likely to be insufficient as a result and this causes underinsurance.
Also, underinsurance can be caused by incorrectly calculating the value of your home and contents, failing to include, for instance, the cost of removing debris in your calculations, increased repair costs caused by inflation and lessening your premiums without thorough care.
It is the client’s responsibility to avoid underinsurance. Whether your insurance policy cover is inaccurate due to deliberate misinformation or unintentional carelessness, your insurance provider will not act with any empathy if you need to make a claim. When applying for insurance cover, it is your responsibility to make sure you consider the replacement cost of all your property.
The consequences of underinsurance can be significant regardless of whether you are accidentally or deliberately underinsured; the results are the same. Underinsurance can be damaging for you in two different ways, the inability to claim for your full loss. The insurer will apply the average clause, meaning the insured will be able to claim even less.
“The insurance provider may also decide to cancel the cover if you are underinsured. This has further implications for obtaining building and contents cover from an alternative provider: you will find you have a limited choice of providers willing to provide cover and your premium cost will likely increase because of a prior canceled policy. An insurance provider who discovers your cover was insufficient (i.e., you were underinsured) may also void and recall any previous pay-outs for claims made against that cover, adding to your financial difficulty,” an expert explained.
According to the expert, most insurance policies typically contain an underinsurance penalty clause which insurance professionals know as ‘average.’ The average clause in insurance states that if a property is underinsured, the insurer is only liable to pay for a percentage of the value of items lost, leaving the policyholder to pay for the remaining cost, determined by the percentage that the property is underinsured.
Underinsurance clauses do not only apply to building cover but can also apply to other parts of the policy such as loss of rent, stock and contents and landlord contents cover.
Avoiding underinsurance requires a thoughtful understanding of your own insurance needs and a proactive approach in regularly reviewing and updating the coverage. To begin with, it is vital to fully comprehend what your insurance policy covers and what it does not. This will allow you to identify any potential gaps in your coverage.
It is also essential to accurately assess the value of your assets. Underestimating their worth can lead to underinsurance. Regularly reviewing your insurance policy and updating it as your life circumstances change is another crucial step to avoid underinsurance.
Again, to avoid underinsurance, it is pertinent to understand your policy and ensure you fully comprehend the ins and outs of your insurance policy, including what is covered and what is not.
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