Rising raw material prices increase the risk of underinsurance

The Nordic region's largest insurance company, If Insurance, is currently looking to insure higher values for its large corporate clients in connection with insurance contract renewals. One key factor behind this, can be found in the large price increases for raw materials.

When there is a fire in a production facility, or a critical machine breaks down, business operations will cease. Today, re-building a facility or repairing business critical machinery can be more expensive, due to massive price increases for raw materials. This lack of raw materials, which includes e.g. plastic, steel, as well as microchips and electrical components, can lead to longer periods of inactivity and business interruption.

“For many client’s they have already experienced the raw material shortage on their own costs, as prices have risen over the past year especially. However, that does not mean, that they also reflect that the company's physical and financial values have also risen. Restoration after a claim can be much more expensive today because the prices of raw materials and materials such as glass, metal and wood have risen significantly throughout most of 2021,” explains Kristine B. Wagner Head of Underwriting, BA Industrial at If Insurance. 

“When we look at the claims we have had recently, there are definitely examples of clients underestimating their own values. The trend is recurring throughout the entire Nordic region, and this is something that they need to be aware of, to not be underinsured when a major claim occurs,” she says. 

Underinsurance occurs when the sum stated in the insurance contract does not correspond to the actual value and conditions covered. If the sum is too low, it may ultimately mean that one does not obtain the necessary compensation to re-establish operations after a fire, flood or other extensive damage. 

Kristine Birk Wagner, Head of Underwriting, BA Industrial

Price increases must be recognized in the values 

Working together with our clients, If Insurance encourages customers to include the price increases in the valuation when calculating their values. 

“Although the values set in the insurance contract are inherently based on an estimate, it can be qualified by either contacting the insurance company's experts or in consultation with suppliers and advisers. You can also buy highly qualified assessments from consulting firms that specialise in this area,” says Kristine B. Wagner. 

If Insurance regularly undertakes the valuation of buildings, equipment and facilities, but this is not always practically possible on all insurance policies. Therefore, it is normal for clients to value their assets themselves, and then utilise the insurance company to secure a second opinion on the largest total values. 

According to Denmark's Business Statistics Tendency Survey, production restrictions have risen to the highest level ever witnessed in industry due to a shortage of materials and equipment. Arguably, the shortage in construction materials has not been greater since the years leading up to the financial crisis. 

The price increases are, in part, due to the aftermath of the coronavirus pandemic. Firstly, the demand for building materials in connection with the renovation, conversion and extension of private homes has increased significantly. In addition, the supply of construction products has declined, partly because supply chains have experienced delays in securing materials due to closed ports and borders.