In this article
Key points
- Underinsurance occurs when the sum insured is lower than the replacement value of the asset.
- The replacement value is the reconstruction cost, not the sale price or the tax value.
- In the event of a loss, compensation is reduced proportionally, even for partial damage.
- Have your sums insured reviewed every 3 to 4 years.
In the insurance sector, correctly assessing the replacement value of an asset is essential to guarantee adequate cover and to prevent the risk of underinsurance.
Underinsurance occurs when the sum insured in the policy is lower than the replacement value of the insured object. It is important to note that this principle does not apply to first-loss insurance cover.
But what is the replacement value of a property for an insurance company?
Contrary to what one might think, the replacement value of a property does not correspond to its sale price, nor to the estimated value stated in tax returns. In reality, it represents the cost required to rebuild the property, at the time of the loss, with characteristics and quality equivalent to the original.
How is the replacement value determined and what is needed to calculate it?
To determine the replacement value of a property, two main variables must be considered:
- Reconstruction cost per cubic metre (m³): this value depends on various factors, including the quality of the materials used, the structural complexity of the property and the presence of reinforced concrete structures, among others.
- Volume of the property (m³): measuring the total volume of the building is another key element.
What are the consequences of underinsurance?
The repercussions of underinsurance become tangible when a loss occurs. In the event of underinsurance, the compensation paid by the insurer, for both total and partial losses, will be proportional to the replacement value of the insured property. We will illustrate this concept with a practical example:
Example of 30% underinsurance
Table 1| Total loss | Partial loss | |
|---|---|---|
| Description | House completely destroyed by fire | Fire limited to the roof |
| Amount of the loss | CHF 1’000’000 | CHF 200’000 |
| Compensation paid | CHF 700’000 | CHF 140’000 |
| Loss due to underinsurance | – CHF 300’000 | – CHF 60’000 |
Sharply rising construction costs
Recent political and economic developments, such as the COVID-19 pandemic followed by the war, have caused a disproportionate increase in construction costs. These changes make it even more important to update the replacement value assessment regularly to ensure that insurance cover remains adequate and up to date.
In an era of constant regulatory and market change, an experienced adviser is indispensable for making informed, strategic choices.
Ivano Piffaretti, Assidu
Conclusion
To navigate the complex landscape of property insurance with confidence, contact our specialists for personalised advice.
We are here to help you understand and manage the replacement value of your property as effectively as possible, ensuring that your cover is always adequate and protects you against any underinsurance.
Don’t wait: don’t let underinsurance jeopardise your future!
Member of Management · Head of Property and Casualty Insurance Team · Senior Insurance and Pension Consultant
