Skills and Entrepreneurship 49
The false economy of underinsurance
Niraj Mamtora on why businesses need to look beyond the premium
With costs continuing to put pressure on UK businesses, owners and finance directors are right to scrutinise expenditure. Insurance is no exception. Yet there is an important distinction between reducing the cost of insurance and reducing the protection a business relies upon.
Underinsurance remains a significant problem. Recent industry analysis suggests that a large proportion of UK commercial properties may not be insured for their full reinstatement value.
Misunderstanding
The problem often starts with a simple misunderstanding. The value used for buildings insurance is generally based on the cost of rebuilding the property, rather than its market value. That calculation can include demolition, debris removal, professional fees, materials, labour and the cost of complying with current building regulations.
A common example is a business owner who owns premises worth £ 750,000 on the property market and assumes this should also be the amount used for buildings insurance. In reality, the total reinstatement cost could exceed £ 2 million once demolition, clearing the site, professional fees and rebuilding are taken into account. Construction, labour and material costs have all increased considerably in recent years, making outdated assumptions particularly risky.
Equally, in some locations the market value may exceed the rebuild cost. The important point is that the two figures measure different things and should not be used interchangeably.
It has been reported that UK rebuild costs increased by 3.8 per cent during 2025 alone, while separate analysis noted that rebuilding costs had increased by around 20 per cent since 2020. A valuation that was appropriate several years ago may therefore bear little relation to the cost of rebuilding today.
Underinsurance goes beyond buildings
Property is only one part of the issue. Businesses change constantly. They buy new machinery, increase stock levels, refurbish premises, take on contracts, grow turnover and become more dependent on technology. Insurance arrangements do not always change with them.
Business interruption cover is another area that deserves attention. After a major fire or flood, replacing damaged equipment may only be the start of the recovery.
Planning permission, building work, replacement machinery, recruitment, supply chain delays and rebuilding a customer base can take considerably longer than expected. A business that assumes it could return to normal within 12 months may find the real recovery period is much longer.
The consequences of getting these figures wrong only become apparent when something has already gone wrong.
Depending on the policy terms and circumstances, inadequate sums insured can leave a business funding part of a loss itself. A saving made at renewal can become insignificant compared with the financial shortfall following a major claim.
Insurance should follow the business
The answer is not simply to buy more insurance. Businesses should instead treat their annual insurance review as part of their wider financial and operational planning.
Before renewal, management should ask some basic questions:
• What has changed in the business during the past year?
• Have buildings and major assets been professionally valued recently?
• Have stock, equipment or machinery values increased?
• How long would it realistically take to recover from a major incident?
• Could the business continue operating from another location?
• What level of loss could the company comfortably fund from its own resources?
That conversation should involve the people who understand the finances and operations of the business, rather than treating insurance renewal as an administrative exercise based on last year ' s figures.
Good insurance planning is not about buying the highest limits available. It is about understanding the financial risks facing the business, deciding which risks it can afford to retain and transferring those it cannot.
“ The cheapest insurance policy can become very expensive if it does not provide the protection the business thought it had.”
Niraj Mamtora is director of Forum Insurance
www. foruminsurance. com