Private Clients underinsurance: Keeping ahead of inflation by keeping valuations up to date

Research reveals that three-quarters (72%) of brokers believe there is a problem with high net worth private clients being underinsured.

Interviews with 100 brokers who place business with high net worth clients found being underinsured (30%) is a bigger risk facing their high net worth private clients than burglary or theft (20%). The importance of seeking advice from a high net worth insurance broker about regular valuations and setting and maintaining sums insured at the correct level is crucial to avoid the risk of underinsurance. 

Regular price increases 

The cost of living has been increasing across the UK since early 2021. The annual inflation rate reached 10.1% in August 2022, almost a 30-year high, affecting the affordability of goods and services for households. The impact of the cost of living crisis affects everyone, and the wealthy are no exception. 

The value of expensive possessions such as jewellery, art, and collectibles are subject to more extensive and regular fluctuations in value. The rebuilding cost of homes is also increasing, particularly high-end homes that are furnished with unusual, expensive materials or require unique building materials because they’re listed. These volatile conditions contribute to a broader underinsurance problem as many valuations become rapidly outdated. Insurers require accurate, up-to-date valuations, or insurance cover may not cover the cost of a claim.

Price increases on luxury brands  

Despite rapid price increases, luxury products and collectibles remain very much in demand. Watches, jewellery, and handbags are valuable investments that require regular valuations. Credit Suisse suggests Rolex watches and Chanel handbags are amongst the most prized in terms of their return on investment for high net worth individuals. In the current climate, the average annual return of 10% for Rolex watches, for example, is double the usual fluctuation range of 5%. 

Luxury watchmaker ROLEX increased the price of watches sold in the UK by 7%. The price increases come amid growing concern about the pound’s strength. The price change has apparently led to a boom that’s propelled the UK into the top 5 global markets for Swiss watches ever since. 

Designer handbag collections are also subject to rapid price hikes. Chanel handbags have also seen more significant price rises than other brands, with some increasing by 15% in the last year alone. Analysts have cited this hike as a staggering 71% compared to pre-pandemic. So, a small Chanel Classic now sells for £6,520 vs. £4,627 in January 2021 and £3,786 in 2019. 

UK art prices increased by 5.5% in January 2022 compared to the previous year. Prices have continued to rise, and the art market has seen a total of $5.7 billion in sales this year. Art is considered a safer option to protect capital during economic instability. Like gold, artworks are less vulnerable to financial market crashes than stocks and bonds.

Using a broker to prevent underinsurance 

Making an insurance claim can be an emotional time because of the stress and circumstances of the loss. Claims often involve a sentimental loss, as well as a financial one and underinsurance, makes this situation infinitely more difficult.  

Using specialists to calculate the current value of the building, contents, jewellery, artwork, and antiques is essential in improving the accuracy of valuations. Brokers are particularly valuable in the current climate, where currency and share trading are highly speculative and unpredictable.  

While investment in ‘safe’ collectibles increases, so does the value, and this needs to be accurately established and reassessed to manage large increments in value. Using a broker to insure both home and contents accurately should improve the chances of a more comprehensive settlement if all items are correctly valued. 

Brokers can advise customers on the best methods for getting accurate levels of insurance by providing advice on measures such as the following:  

1. Logging contents by room - One method involves logging the contents by room and ensuring everything is itemised. A broker can discuss with the homeowner what they think would be covered in a claim, for example, carpets and soft furnishings. High value curtains and carpets are often overlooked in high net worth homes as owners focus on personal possessions. 
2. Specified Items - If a specified item is underinsured, then the customer would only ever receive the maximum settlement listed on the insurance policy. Sharing up-to-date valuations for things such as antiques, high-value jewellery, and artwork with the insurer should prevent future problems. Jewellery can be a common source of underinsurance because gold and silver prices can fluctuate considerably. Also, jewellery is sometimes purchased abroad, where prices are significantly less than the cost to replace an item in the UK. 
3. Understand ‘sum insured’ - Some homeowners may not fully understand the term ‘sum insured’. When assessing belongings, many might think of historical purchase prices, likely to result in underinsurance. It is essential to know that the figure required for insurance is the amount it will cost to replace all belongings on a new-for-old basis at the time of loss. In the case of buildings, it means the cost to fully rebuild the property in the event of a total loss. Providing the rebuild cost for listed buildings for example, is a more complex process. Some homeowners might arrange to not reinstate a listed building following a loss and build back in modern materials. It’s vital that the homeowner checks whether the local authorities are agreeable to delisting a property following significant damage, before agreeing a sum insured for that property. An assessment will evaluate the damage, which features remain and the local or national importance of a property before deciding how a property must be reinstated. This could involve a significantly different rebuild cost that a broker can agree with the insurer.
4. Regular reviews - Insurance requirements should be reassessed at least every few years. The value of new possessions is constantly changing. It is also essential to review buildings sums insured, particularly if the policy has been in place for a long time. Owners should always calculate the current rebuilding cost rather than the market value. 

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Kerry London is authorised and regulated by the Financial Conduct Authority. The company is a leading UK independent and Lloyd’s accredited broker, which means that we work with a wide range of niche and major insurers.

This note is not intended to give legal or financial advice, and, accordingly, it should not be relied upon for such or regarded as a comprehensive statement of the law and/or market practice in this area. In preparing this note, we have relied on information sourced from third parties, and we make no claims as to the completeness or accuracy of the information contained herein. You should not act upon information in this bulletin nor determine not to act without first seeking specific legal and/or specialist advice. We and our officers, employees or agents shall not be responsible for any loss whatsoever arising from the recipient’s reliance upon any information we provide herein and exclude liability for the content to the fullest extent permitted by law.

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