For all kinds of reasons, inflationary pressures across the globe have been mounting, which in turn has led to a significant buzz around the issue of underinsurance.
For this episode of our podcast, Will Molland, MCIOB AssocRICS, a Director at innovative building insurance valuation providers RebuildCostASSESSMENT.com, explains why the topic is suddenly on everyone's agenda and discusses how long rebuild costs may continue to rise...
If you would prefer to read rather than listen to this episode, you can find the transcript below.
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TRANSCRIPT
Johnny Thomson 00:02
For all kinds of reasons, inflationary pressures across the globe have been mounting and all of this has led to underinsurance becoming a big topic of discussion. Hello everyone and welcome to the RiskACUMEN podcast, which offers thoughtful insight around risk management. Now, the risk of underinsurance seems to suddenly be on everyone's agenda, not only within the insurance industry, but throughout the wider world. So today, I'm delighted to be joined by Will Molland, a Chartered Member of the Institute of Building and an Associate Member of RICS, who is also director of innovative building insurance valuation providers RebuildCostASSESSMENT.com. Hi Will, many thanks for joining me today.
Will Molland 00:46
Hi, Johnny. Hi, good to be here.
Johnny Thomson 00:48
Now Will, there's definitely a significant buzz around the issue of underinsurance right now. I mean, it seems like there's hardly a week or even a day goes by without it being highlighted as a piece of industry news and it's even making its way into the mainstream media now. So why is this?
Will Molland 01:06
So really, what we're seeing Johnny is we're seeing an increase in inflation across the wider economy. So we're all familiar with all types of items that have increased in cost recently. And of course, when you're looking at buildings, insurance in particularly the cost of construction is really highlighted. And it's fair to say from about the start of 2021, we started to see some really sharp upturns in the cost of construction materials, the availability of those materials as well and the increase in the cost of labour. And they started feeding through with some significant rises, structural steel rising by 70% to 80% within a few months , and has had quite a knock on effect on the cost of rebuilding. And anyone faced with a loss, faced with reinstating a building, would have been acutely aware of those costs at the time of the claim.
Johnny Thomson 02:01
It's kind of a cocktail of things isn't it really, because it's as you say it's labour costs, it will also be those professional fees, everything as we all know is going up!
Will Molland 02:10
Yeah, absolutely, absolutely everything feeding into that. And of course what you've got there is you've got two types of inflation at work there, you've got demand-pull inflation, so certainly on the residential side you had lots of people during lockdown decided that they do some work on their houses. This created sort of unprecedented demand for decorating materials, for timber, for paving slabs, everyone suddenly wanting extensions here, there and everywhere. So that, you know, dragged up the price of materials. You then had cost-push from shortages. Increases in manufacturing costs, supply line disruption, etc. And that all fed through and really, you know, really pushed up the cost of construction.
Johnny Thomson 02:51
And looking at this issue from an insurers perspective, there's obviously a clear financial need to address under insurance, isn't there?
Will Molland 02:59
Well absolutely. You know, from an insurers perspective, they're taking premium payments from policyholders and those premium payments very much represent the amount of liability and the cost expected by an insurer if there was ever to be a claim. If a claim is made and for example, reinstatement works are found to be 50% underinsured, and only 50% of the premium has been collected, then you've got a real problem there for the policyholder. They're not going to get a sufficient payout and the insurance company is going to have to do something about that. You know they're not going to be able to pay that claim in full, because the appropriate premium hasn't been paid on that policy. So yeah, a no win situation for everyone.
Johnny Thomson 03:41
Yeah. So it's a case of them really trying to drive things to a point where they're getting a premium that is commensurate with that risk, yeah?
Will Molland 03:48
Yeah, absolutely. And you've also got reinsurer rates sitting in the background as well. So all these insurance companies that we see from the media and the television advertising, behind them sit very, very large insurance, reinsurance companies. You know, they're the ones that provide the capacity to the front end of the market. They require information and they require an acceptable return on their money, and all that has to be in place in order for the insurer to be able to pay out. So it's all about getting the correct premium, getting the correct level of cover. Obviously, the reinsurance falls into place behind the scenes. And when it comes to a claim, do insurers really want the, you know the reputational damage that's caused by having to repudiate those claims. Of course not. You know, they want to get those risks on the correct basis from day one and if there is a claim, they can deal with them.
Johnny Thomson 04:41
Absolutely, and that feeds nicely into the the insurance brokers point of view as well, because in underinsurances is significant from an end-customer, the policyholder, their client...
Will Molland 04:53
Absolutely right. I mean, brokers work extremely closely with policyholders, you know that's their role to understand their client's needs. Understand their risk, you know what sort of cover they need, what's the best cover for their business, for their property. And then present that to insurance to a panel of insurers and get the best deal for their customer, which isn't always the best price of course, it could be the, you know, the correct level of cover, the breadth of cover, the scope of cover.
Johnny Thomson 05:19
Yes and of course brokers are facing an issue as well around something called the Consumer Duty, which is coming into effect later this year. And this is places even further pressure around positive outcomes for clients
Will Molland 05:31
It does indeed and it's very much thinking about that in the context of the 2015 'treating customers fairly' FCA report. And, you know, that was a couple of years before RebuildCostASSESSMENT started to get going. And it was quite interesting in the early days, that there was a steady stream of brokers who had understood his report and the implications of it and what that meant in terms of outcomes for policyholders. And that very much fed into the early days of RebuildCostASSESSMENT. And as we think about the growth of the business, more and more firms came on with us, we started then to grow and obviously the problems around construction cost inflation has fed into that. And of course, we see the Consumer Duty feeding into this as well. So in terms of awareness across the industry, there's been growing awareness for many, many years, but I would say you know, at the moment, it's at an all time high.
Johnny Thomson 05:38
And I guess, I guess another reason which you've just touched on there, why underinsurance is a hot topic, is because there is now that more accessible and affordable solution to the problem. Let's go back say, you know ten years Will and paint a picture of what it would have taken for a homeowner or a commercial property owner to actually obtain a professional assessment of reinstatement costs?
Will Molland 06:42
I think 10 years ago, you know, it would have been a very different world. In order to obtain a reinstatement valuation or rebuild cost assessment, it would have meant going to a local firm of Chartered Surveyors, it would have been more expensive, it would have almost certainly resulted in a site survey. It really wasn't any desktop provision in those days at all. You probably even had, 10 years ago, some broking firms who would possibly give a bit of a steer, maybe a bit of advice to the policyholder about the amount they should be insured for. You know, that's commenting on the level of cover. I mean, that's something that, you know, doesn't happen really now. And it doesn't need to happen. There are firms like us that can deal with that. But it was, you know, really quite a different environment.
Johnny Thomson 07:24
It's all changed, and it's a lot more digital and of course, it's remote in approach significantly now, isn't it?
Will Molland 07:31
Oh, absolutely. Yeah, I mean here a RebuildCostASSESSMENT, we can gather information through, you know, multiple data points. One of the things we've seen over the last few years is the increase in the amount of planning information that's online, that's all searchable. We can gather floor-plans, elevations, etc. You know, really quite a large amount of data on a property. We've also got ordanance survey mapping tools that we can use, various satellite imaging techniques as well. Online estate agency information, as you can imagine that industry has been going from strength to strength. So you know, the amount of data that's out there now, not just on residential properties as well, but also on commercial properties that's available to us, is increasing year on year. And we've learned an awful lot, you know, in the seven years that the business has existed about how to do this.
Johnny Thomson 08:20
But you still do the traditional stuff as well, don't you? There is still a need for you to go out and visit properties, isn't there?
Will Molland 08:26
Yeah, absolutely right. Yeah, I mean, we're still carrying out hundreds of site surveys a month. And you know, that need continues. Listed properties are a key area to look at. There are 100,000 plus listed properties in the UK. Some of those are quite heavily protected, so grade one listed, for example. And, you know, it's an area of underinsurance that, you know, we've seen for years. And yeah, definitely those properties need a site survey. And the more complex risks always require a site survey, where you've got multiple properties in the same location as often we can site survey there. And some of the more bespoke structures as well, particularly properties in a coastal location involving sea walls, properties close to water. These are the kind of areas we're site serving.
Johnny Thomson 09:14
And overall demand for your services has, well it's rocketed hasn't it in the past couple of years.
Will Molland 09:23
Yeah, absolutely. I mean, we've seen, certainly in the last couple of years, you know, we've quadrupled the amount of work we're doing here. I can go back to the early days of the business. You know, we're now completing in a month, the same amount of work that we would, we would have taken several months to have got through. We've grown the team considerably, taken on a whole new office floor. Yeah, it's been a really, really strong period of growth for us the last few years.
Johnny Thomson 09:46
Which isn't just great news for you, but for the thousands of property owners who now know how much they should really be insuring their properties for?
Will Molland 09:54
Absolutely right. I mean, you've now got an affordable, accessible solution that can be turned around in days rather than weeks or months and, you know, policyholders can get themselves on the appropriate cover quickly, accessibly, and get their insurance set correctly from day one.
Johnny Thomson 10:12
Looking ahead from here Will, we've seen this dramatic rise in construction costs, professional fees, labour costs and so on pushing up rebuilding values, are these costs just going to keep on rising?
Will Molland 10:26
They're not going to keep on rising at the same rate we've seen. I think the general view at the moment is that we've had a period of really steep rises. I mean, if we think about, you know, some aggregates, some of the price rises there, we've seen jumps of 40%, 50% within a few months. As I mentioned steel earlier, you know really steep increases in steel. The general building costs for components, the doors and windows, etc. They've risen steadily, and they continue to rise, but we are starting to see a levelling off. So I would say, costs will continue to increase, but they won't be increasing at the rates we've seen certainly over the last 12 months. I think the one area I would keep an eye on though, is cement, concrete, energy intensive areas, bricks as well. They're very much dependent on the feeding through of energy costs. So once energy cost starts to settle down, then we'll start to see the cost of those items levelling off as well. But we're not quite there yet.
Johnny Thomson 11:32
Yeah, things aren't quite linking or by either are they, because we've seen energy costs actually come down but they're not really feeding through yet, are they?
Will Molland 11:40
No. So these large brick manufacturers, for example, you know they have long term contracts in place for energy, so they won't have been hit with the high energy costs straightaway. But of course, as they come up for renegotiation, those costs will increase. They're then finding themselves on longer term contracts, potentially they could find themselves perhaps paying a little bit more than the market rate as the time goes on. But yeah there certainly will be a bit of lag there.
Johnny Thomson 12:03
And there was almost a surprising report wasn't from Citibank recently reported in the FT, which showed a huge kind of falling off of the rate of inflation potentially?
Will Molland 12:14
Yeah, absolutely. So they're predicting inflation towards the end of the year at 2%, which is really quite a lot lower than I think, a lot of other estimates, which seem to be around the 4% or 5% mark. I think interesting that, you know, there was very small growth in the economy back in January. GDP grew, I think it was by about 4.3% or something. That I think was unexpected as well. So I think talk of recession, perhaps is sort of being kept to one side, but it's extremely slow growth and it's and it's more of a levelling off period. But undoubtedly, you know, we've got a lot of challenges in the construction industry in the UK. I mean, we've got continuing issues around labour availability, we've also got issues around insolvencies. So they're running at all time highs as well. We've also got, you know, just general level of demand as well.
Johnny Thomson 13:07
And I guess, if demand falls, we could even see things swing around in the longer term.
Will Molland 13:12
We could do, we could indeed, yeah. I mean, I think given a worst case scenario perhaps of a recession, and maybe a fall off in construction projects and projects being mothballed. Then yes, we could see some of these costs even starting to come down. However, I think it's a bit early to call that at the moment.
Johnny Thomson 13:30
But yeah, I guess in a situation like that we may even see it swing to an over insurance situation, or..?
Will Molland 13:37
It's possible. Yeah, I think it is. I think at the moment, most people are expecting costs to kind of level out and remain relatively static. I think, looking at contractors, and we look at the tender price indices, which are quite a key measure in this area, they are relatively low when you're forecasting out two or three years in the future, which is tending to imply that the industry is going to run along at a fairly level pace once we've got through these recent spikes in inflation. But that's not to say that, you know, the cost of construction is going to come down, we get back to a more normal for whatever that word means, rate of inflation of maybe three, four or 5% in the construction industry, and not the recent we've seen of 15, 20, 25% in certain areas.
Johnny Thomson 14:28
And I guess the level, the sheer level of underinsurance is... even before all of the rising construction costs, it was so significant wasn't it in terms of, you know, around about two thirds?
Will Molland 14:42
It was, yeah.
Johnny Thomson 14:44
Is where it sits, I understand?
Will Molland 14:45
Yeah, that's right.
Johnny Thomson 14:46
And even even in that situation, it would take a long time?
Will Molland 14:50
Yeah, it would. I mean, we've looked at this over the years, and it's interesting how consistent it is really that there is this level of cover that comes up with businesses, properties, homeowners insured for around about 60%, 66% of what they should be covered for. I think one of the things we are seeing at the moment though, with all this, you know this raising of the profile of underinsurance, we are seeing a significant number of very, very badly underinsured risks coming to the fore. And, you know, it's ithe case that they've almost been flushed out of the system by the increasing awareness and the increasing oversight now,
Johnny Thomson 15:28
I guess, overall though the good to come out of this is the fact that we're seeing insurers, brokers and providers like you now working together to tackle this problem. And I mean, underinsurance can be a traumatic experience for property owners in the event of a claim can't it, I mean especially if it is a big one?
Will Molland 15:50
Oh, absolutely right. You know, if you're significantly underinsured, let's say 50%, for the sake of argument. You know, you are having to dip into your own pocket for what could be a considerable amount of money and tens of thousands, potentially hundreds of thousands of pounds. Now, you know, in terms of homeowners, small-medium sized businesses, you know where's that money going to come from? It's going to come from increased borings, it's going to come from business reserves, it may not be available at all, in which case you know, you're looking at the spectre of business failure there. It's also, you know, really quite a serious problem when you couple that with business interruption as well. So one of the key parts of our rebuild cost assessment reports is we always put in a rebuild period. And that's a calculation that we're making there based on the time it will take to rebuild that property, you know as a construction project, and the time it will take you to get to the point at which you start rebuilding. And these are different numbers. It's likely that certainly in the current sort of construction market, by the time you've cleared the site, settled the claim, found a contractor who can do the work, you know, engaged into a tendering exercise, etc, procure that to contractors as a start, your several months on from the time of the loss before you even start. And then looking at possibly a couple of years to rebuild, maybe 18 months. You know, if you've got those numbers wrong and you've got your indemnity period wrong and your business interruption insurance, and you find that your business interruption cover is running out, let's say six months or 12 months, before you've actually got your business back on its feet, you'll find yourselves, you know, really considerably exposed then. And really, you know, unable anywhere to turn you know, you're not covering the cost of your alternative accommodation, yet, you haven't got your new premises finished. So that can end up as a really dangerous squeeze that, you know, can actually cause businesses to fail.
Johnny Thomson 17:47
Absolutely. Any other messages Will you'd like to get across around the issue right now?
Will Molland 17:53
I think the key one is really, you know, talking to insurers and brokers, it's a case of you know ask the policyholder when was the last time they had the rebuild cost looked at? Have they got a recent rebuild cost assessment? You know, find out the timescales. Dig around and ask the questions. And speaking directly to property owners, do really be careful with these kind of, you know, fag-packet calculations, numbers that are pilled off the top of your head. Dare I say it, speaking to your mate, a builder down in the pub. All these numbers can often end up rather too light and coming to a company like us, you get a robust cost analysis, you get your rebuild your area measurements, you rebuild rates, your professional fees, your demolition, all itemised in the report. Includion and exclusion VAT amounts, external items as well all covered off in there. So you can be absolutely sure that in the event you had to make an insurance claim and you're speaking to a Loss Adjuster about your sum insured, you've got that report to back it up.
Johnny Thomson 18:58
Great stuff. Well, thanks again Will for for coming down and covering the risk of buildings under insurance from many, many different angles all in one go. Well done.
Will Molland 19:10
That's alright. Thank you Johnny.
Johnny Thomson 19:12
Much appreciated. And that's all we have time for this episode of the RiskACUMEN podcast. If you have any questions or comments around the topic we've discussed today, or any of our other risk related content, please head to our LinkedIn page. You can find a link at riskacumen.co.uk. In the meantime, thanks everyone for listening in. And until next time, goodbye for now.
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