Insights & Articles

Most businesses assume that if disaster strikes, their property policy will pay to put things back the way they were. In practice, a growing number of claims are being settled well below what policyholders expected, not because of a coverage dispute, but because the sum insured on the policy no longer reflects what it would actually cost to rebuild or replace. This is underinsurance, and it is one of the most common, and most avoidable, gaps in property programs today.

Why Sums Insured Fall Behind

A sum insured that was accurate three or five years ago is rarely accurate today. Several forces are widening the gap between what a policy insures and what a rebuild actually costs:

Construction cost inflation. Material and labor costs for rebuilding have risen significantly across the region in recent years. A sum insured calculated even a few years ago is likely to fall short of current reinstatement costs.

Asset growth outpacing policy reviews. Businesses expand, add machinery, fit out new space, and accumulate stock, often faster than their insurance program is updated to reflect it.

Valuations based on book value, not reinstatement value. Accounting depreciation reduces the value of an asset on the balance sheet, but it does not reduce what it costs to replace that asset today. Policies based on outdated or depreciated figures routinely understate true exposure.

Reinstatement cost calculations typically account for several distinct components: construction material and labor costs, debris removal and site clearance, and professional fees such as those for architects and engineers overseeing the rebuild. This is a meaningfully different figure from a property’s market value, which is shaped by land price, location, and buyer demand rather than actual rebuilding cost, and which can significantly understate what it would truly cost to reconstruct a damaged property. Getting this calculation right matters more, not less, as construction costs and building standards continue to rise, which is why insurers and risk advisors increasingly emphasize periodic reinstatement cost assessments rather than relying on a figure set once and left unchanged for years.

How Average Clauses Turn a Gap Into a Bigger Loss

Many property policies include an average, or co-insurance, clause. If your declared sum insured is found to be lower than the true value of the property at the time of loss, the insurer only pays out that same proportion of the claim, not the full amount of the loss. In practice, this means a business that is 30 percent underinsured does not simply receive 30 percent less on a small claim. It can also mean every claim going forward, large or small, is reduced by that same proportion, for as long as the underinsurance goes uncorrected.

This Applies Differently for SMEs and Large Corporates

For SMEs, underinsurance often comes from simple inattention: sums insured set once at policy inception and never revisited as the business grows. For larger corporates, the risk is more often structural: complex multi-site portfolios, machinery and equipment schedules that are updated inconsistently across business units, and valuations that rely on internal estimates rather than independent survey.

• SMEs should treat an annual sums insured review as a standard part of renewal, not an optional extra.
• Larger corporates should consider periodic independent valuations across major sites, particularly where machinery, plant, or specialized equipment makes up a significant share of asset value.

What a Sound Property Program Should Include

1. Reinstatement value basis, not depreciated book value, as the foundation for your sum insured.
2. A regular review cycle, at minimum annually, that accounts for construction cost movement and asset additions.
3. Independent valuation for significant or complex sites, rather than relying solely on internal estimates.
4. Clear understanding of how any average or co-insurance clause in your policy would apply in the event of a partial loss.

The Bottom Line

A property claim is one of the worst moments to discover that your sum insured was never quite right. Reviewing valuations before a loss, not after one, is the only way to be confident that your policy will actually put your business back where it was.

Speak to our Property & Casualty team about reviewing your sums insured ahead of your next renewal.