Not another inflation story
Whether in the news, social media posts or conversations with colleagues, friends or family, it isn’t going away any time soon.
You will have no doubt felt the impact of recent hikes in inflation and the current cost of living crisis, be it in your business or personal life. And whilst I don’t want to be doom and gloom about it, you must be aware that inflation will also impact your business insurance.
Inflation is at its highest point in 40 years. The cost of materials and services has increased. Pressures on the supply chain and shortages across the board also contribute to price increases and the availability of resources.
But how does this impact your insurance coverage?
There are three areas to consider. None of them is pleasant to talk about, but it is necessary to be aware of them.
During your next renewal, don’t cut back on your cover.
It’s a human instinct. When times are tough and money is tight, we look at ways we can cut back. Business Insurances are an area that is keenly targeted by the cost cutters – with some covers seen as a ‘nice to have’.
Cyber, D&O, Crime Cover… these are just some of the covers that are seen as ‘nice to haves’.
The critical issue here is that these covers are more important now. The increase in your cost of sales will cut your cash reserves, meaning you won’t have the cash to self-insure these covers should you need to pay a ransom or a fine due to perceived negligence during your duties.
For example, Criminal defence firm Tuckers Solicitors has been fined £98,000 after failing to secure sensitive court bundles that were later published on the dark web and held to ransom by organised criminals.
If you are thinking of cutting back, speak to your advisor first to understand the potential impact of your decisions.
Previous economic downturns coincided with increases in financial crime and fraud. During Covid-19, history repeated itself. The UK’s Office for National Statistics (ONS) recorded a 42% increase in fraud involving financial investments between May 2020 and March 2021.
The World Bank predicts that global growth will slump to 2.9% in 2022 and stay at that level throughout 2023-2024
Fraud in every area of our economy will likely rise again to continue as we head into another economic downturn, placing pressure on the insurance system.
There are things you can do to mitigate fraud:
- Update your fraud risk assessment - This will help your business focus on what anti-fraud approaches work best. In addition, this will inform your choice of technical measures to prevent fraud.
- Improve employee practices - During a recession as risky behaviour becomes prevalent. Use security awareness training regularly to identify critical areas where fraud can happen. This should include training on social engineering tactics focusing on individuals within the financial departments.
- Review hiring and exit strategies - Review your hiring processes and policies to ensure that you carry out robust checks on potential employees. Also, ensure that you have a system to remove access to corporate networks and apps when employees leave your company.
- Take extra care against cyber attacks - With increasing threats from cybercrime, protect your business technology against attacks.
- Secure and protect your property - This includes laptops, computers, smartphones and intellectual property. Whilst business insurances can help replace property or fight for your intellectual property; you should consider prevention strategies first. For example, use and maintain inventories to know who has what equipment.
Rising costs of replacement can lead to underinsurance
The rise in inflation and prices of materials and services will dramatically affect your sum insured.
You must consider how these rises and supply chain challenges will affect your business should you need to raise a claim. For example, are your sums insured still adequate? Are you at risk of underinsurance?
Now is the time to review!
The simplest definition; is underinsurance, when businesses and individuals are at risk of insurance coverage that doesn’t match the value of their assets.
Reinstatement Valuation and Sums Insured
For Property Insurance purposes, a reinstatement cost valuation by a qualified valuer should be sought. This calculates the cost to rebuild the property should it be destroyed. This is different from a market valuation which represents what the property may sell for at a given time.
The rising costs of materials you buy to create your products will also affect the cost of replacing your stock (sitting stock, projects in progress (WIP) and finished products yet to be sold). If your sums insured have not been inflated at the same rate, then you may be left with a shortfall in the value of the claim.
Rebuild Cost Assessment:
Buildings should always be insured for the amount it would cost to rebuild them. However, fewer than one in ten commercial properties in the UK are covered correctly.
Getting someone to visit your property to conduct a professional assessment can be time-consuming and expensive. However, thanks to our partnership with RebuildCostASSESSMENT.com we can offer you a reliable low-cost service from a ‘Regulated by RICS’ (Royal Institution of Chartered Surveyors) organisation.
You’ll receive a comprehensive Rebuild Cost Assessment (RCA) report guiding you on how much you should insure your buildings.
This is a fantastic and affordable online service which can protect your organisation from the potentially severe consequences of underinsurance.
Insurance is never high on the agenda, but it should be placed on the agenda during times of economic uncertainty and rising costs.
I recommend you review some of the practical fraud prevention steps mentioned above, and that you speak to your advisor to seek clarification if you are exposed to the effects of inflation.