How tech is redefining property insurance in the age of climate uncertainty

Ed Halsey, CCO of Taveo looks at the crippling issue of underinsurance in commercial property, which has been brought into sharp focus in the wake of Storm Babet.

Related topics:  Finance,  Property,  Commercial,  Insurance
Ed Halsey | Taveo
20th November 2023
Storm Damage 266
"To safeguard their investments and ensure tenant business continuity, landlords need to regularly update their insurance policies and find a balance between comprehensive coverage and the practical management of their property portfolios"
- Ed Halsey - Taveo

The recently devastating impacts of ‘Storm Babet’ were a real wake-up call for the commercial property insurance landscape. Amidst widespread flooding, the storm’s impact extended beyond residential property, striking at the core of business property and infrastructure.

Storm Babet stands as a pivotal reminder of the increasing frequency and intensity of natural disasters in our changing climate, as demonstrated by the country reaching record-breaking temperatures of 40°C in 2022. This surge in extreme weather events, intensified by climate change, poses significant challenges for property insurance.

With the UK witnessing a growing susceptibility to weather-related damages, businesses and insurers alike are confronted with a pressing need to reevaluate their risk assessments and insurance strategies.

Why small businesses are often underinsured

Commercial property insurance is designed to protect businesses against physical damage to their properties, covering losses from events such as fires, natural disasters, vandalism, and other external factors. A major issue that has emerged is the widespread prevalence of underinsurance - or worse, no insurance at all. A recent survey highlights that a concerning 80% of SMEs in England & Wales are underinsured.

Underinsurance means that insurance policy limits are insufficient to cover risks, posing a serious threat to businesses. It's particularly problematic during extreme weather events, where rebuilding costs can far exceed insurance coverage, leading to market disruptions and increased demand for public sector disaster relief.

Often, this stems from outdated property valuations misjudged infrastructure risks and forecasted reconstruction costs, leaving business owners unintentionally underinsured and financially vulnerable.

The impacts of underinsurance

Small businesses, with less financial reserves than their enterprise counterparts, are more susceptible to the negative effects of underinsurance. Here are six key ways underinsurance can affect these businesses:

1. Financial shortfall in rebuilding

Underinsurance often results in a significant gap between the insurance payout and the actual rebuilding costs, exacerbated by the rising construction supply chain costs. This leaves small businesses struggling to fund the shortfall, potentially leading to financial instability.

2. Operational disruptions and extended downtime

Insufficient coverage can lead to prolonged closures while waiting for repairs and rebuilding. For small businesses, this downtime not only leads to direct loss of income but can also cause long-term damage to customer relationships and market position.

3. Increased risk of debt and bankruptcy

The financial strain from covering uninsured losses can lead to increased borrowing, unsustainable debt levels, and in worst cases, bankruptcy, jeopardising their future operations.

4. Legal and regulatory challenges

Failing to meet legal requirements for rebuilding due to underinsurance can expose small businesses to regulatory penalties and legal disputes, adding to their challenges during recovery.

5. Business confidence and reputation

The inability to promptly recover from a disaster can undermine stakeholder confidence and damage the business's reputation. This is particularly detrimental for small businesses, where reputation and customer trust are crucial for survival.

6. Long-term impacts on business growth

These effects can threaten the long-term viability and growth prospects of small businesses. This includes the increased difficulty in obtaining future coverage and the potential escalation of insurance premiums, making it more challenging to manage future risks effectively.

These challenges highlight the critical need for small business owners to reassess their insurance policies regularly against the evolving risks posed by climate-changing conditions.

What commercial property insurance means for landlords

Landlords of commercial properties must also confront underinsurance risks. These can often be caused by outdated valuations or misjudged risk perceptions. These challenges are intensified by the need to manage liabilities from tenant activities and the wear and tear of properties, amidst evolving weather-related risks.

To safeguard their investments and ensure tenant business continuity, landlords need to regularly update their insurance policies and find a balance between comprehensive coverage and the practical management of their property portfolios.

Steps businesses can take against weather-related risks

In an era marked by climate uncertainty, businesses must take proactive steps to safeguard their assets. The increasing threat of extreme weather necessitates a more forward-thinking approach to property insurance and risk management.

Here are five key actions businesses can undertake:

#1 Regular insurance reviews: Businesses should conduct frequent reviews of their insurance policies to ensure coverage is in line with the current value of their properties and the evolving nature of risks. Harnessing advancing analytics and technology can provide deeper insights into these evolving risks.

#2 Risk mitigation strategies: Implementing measures to mitigate risks, such as flood defences or fire-resistant materials, can not only protect the property but may also lower insurance premiums.

#3 Accurate property valuations: Utilising services which leverage emerging technologies to reduce the risk of underinsurance, can provide precise and current valuations, effectively reducing the risk of underinsurance for businesses.

#4 Staying informed: Staying up to date with climate trends and regulatory changes can help businesses anticipate and prepare for potential impacts on their properties and insurance needs.

#5 Seeking expert advice: Consulting with insurance professionals can provide businesses with tailored advice and solutions to meet their specific insurance requirements.

By following these steps, businesses can become far more resilient against weather-related risks and safeguard their investments in an unpredictable environment.

Therefore, as the evolving commercial property insurance landscape continues to present new challenges, the role of tech-enabled insurance brokers becomes increasingly important. Their expertise and advanced technological resources will help ensure businesses, especially smaller enterprises, can adapt and thrive in an ever-climate-affected future.

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