Episode 7: Sums Insured Explained


In this podcast, we are discussing the subject of Sums Insured and the importance of protecting against under-insurance. Put simply, sums insured is the maximum amount an insurance company will pay to a business or person who is making a claim on an insurance policy.


Joining me in this discussion is EBM Account Manager, Felicity Evensen.




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Disclaimer 0:00 

In this podcast, we have provided general advice only and not personal advice. In giving this advice we have not considered your personal circumstances.


Sandy 0:19 

Welcome to EBM Insights. In this podcast we're discussing the subject of sums insured and the importance of protecting against under insurance. Put simply sums insured is the maximum amount an insurance company will pay to a business or person who is making a claim on an insurance policy. Joining me in this discussion is EBM Account Manager Felicity Evensen. Welcome, Felicity.



Hi, Sandy, thanks so much for having me on.



Now, Felicity, the reason we're chatting today is to highlight that many policyholders only check their insurance requirements every 12 months. And generally this is prior to the renewal of their policies. In this current economic climate, there are now factors that could greatly affect how an insurance policy is paid out if a claim is made, particularly when we look at property sums insured. Can you take us through some of these current factors?


Felicity  1:19 

Sandy, I will try. And look what it really comes down to I think, and you will, right touching on that. It's the current economic environment. Yeah. It is like nothing that we've seen for a very long time. And so shout out to my year 12, economics teacher, Mr Gratiae, who said it would come in handy. And it definitely has been demand and supply. That's basically what this comes down to. And it's been a smelting pot. Like we have seen the writing on the wall over the last 24 months and just basically coupled with the fact that yeah, COVID-19 has had a huge impact, probably more than any one group was really prepared for. But basically, it comes down to, you know, apprentices, skilled labour.

The cost of materials has gone up, because I mean, COVID-19, we're not travelling anywhere, nobody. Yeah. So what is happening is everyone's decided to, hey, we're gonna put our travel budget into our house. It's what I've done. I know what I've done. I think I know, probably 10 to 12 people in my immediate life that did the same thing. And me too, I've just put down lights in. It's very exciting.


Sandy 2:46 

I've put in decking and soakwells, even more exciting.


Felicity  2:51 

Well, my list is growing day by day. So as you can imagine, if it's just you and I in this room, like the amount of people out there that are doing the same thing. So that's basically what it comes down to is the supply and demand. And so an example is Yeah, my mom and dad are in the middle of also renovating their house, they've sold their house too. So a lot of people are taking advantage of the market at the moment where there's just an absolute demand for houses because the government stimulus package as well were to get the last year when they released the rebuild for 150,000. or sorry, renovate for 150,000 or get in and start building. That's had a huge impact as well, I think there was a whole heap of younger people that I knew that signed up to build a house. Yeah. After years and years of thinking about the kick start. Yeah, that's basically what it comes down to.


Sandy 3:50 

Right. And you also said you hadn't prepared for this podcast, but I see you clearly have.


Felicity  3:56 

I think when you're living and breathing it, it comes naturally. Yeah. And also another plug to Mr. Gratiae my year 12 economics teacher, he was very much a keep your finger on the pulse. And so that's what we have to do as insurance brokers. But just as you know, to know what's going on as well. I want to buy a house in the next couple of years, and there's nothing out there.


Sandy 4:17 

Well, I have to say that's the first time we've given some kudos to a year 12 economics teacher so well, it's well worth it well worth. We know that some may be tempted to risk nominating lower sums insured, but in the event of a claim, especially one involving a total loss. That decision can be a false economy. What do you see are the factors that can contribute to underinsurance and the impact?


Felicity  4:47 

I don't think clients go into I mean, you and I, we're probably in the same boat as this. I'm not a valuation expert. I don't know what the real cost of building is. I can give you a darn good estimate. Yeah, but I actually don't know. And I can't remember the last time I got my house actually valued. So I'm in the same boat as many of our clients are. And that's the conversation that I have time and again, they really just don't know. And on top of that, I mean, I've had a couple of conversations with clients, but everyone knows Bob the Builder, who can rebuild, or as you know, Larry can do that. Yeah, half the price, you know, than what I've got it insured for. And that may be the case. But there are certain factors that people don't take into account such as the demolition costs, they are through the roof. And sometimes I mean, I'm seeing I'm dealing with a claim right now, with the cyclone up north, where the demolition costs are upwards of $30,000 just to remove a tiny bit of debris. Because it's a semester's. So people don't take that into account, either. So these are all things that yeah, that have an impact on the under insurance. So I think, yeah, definitely don't leave it to 12 months or a month before your renewal. And just keep it on the forefront of your mind.


Sandy 6:08 

Yeah. And I'll just read out a few. A few points. We've noticed from different research we've done Yes. So the cost of cement, copper, zinc, lead, and other metals has also risen sharply, with some commodity prices up to 70% year on year. Also, as you mentioned, cost of trades has increased. So in December 2020, bricklayers were charging $1 per brick to lay six months later, that cost is around $2 a brick. All of these are having an impact.


Felicity  6:43 

So I think that that dovetails in you were telling me, I mean the COVID the delays that we're seeing with actual building materials coming in as well, that is all contributing to a huge, a huge inflation of the rebuild costs. Because if you don't have materials there, if you don't have skilled labour, if you don't have the things that you need to actually get things rebuilt, the costs and costs, it's just gonna go up and up. And it is.


Sandy 7:19 

So thank you again, you've also plugged our last podcast on the Suez Canal blockage. So thank you. If you listeners didn't catch that one, please take a listen after this one, go and have a listen. We love Carmel, we do we do. So the other side of this is ensuring business goods, stock on hand and assets. Again, the cost of many raw materials and supplies have increased alongside freight and labour shortages. Can you tell us a bit more about what is happening here?


Felicity  7:47 

Yeah, I think so. This is also coupled with we've had bushfires, we've had catastrophes all across the board just in Australia. And then we've all of that is compounded because there's just a backlog. It again comes down to the supply and demand, the demand is just so huge at the moment. And we cannot keep up our rebuilding and our cost of trades and our skilled labourers. We just don't have the supply that is needed. And so like I said, I don't know how much longer that it can go on. Yeah. But it will I don't see an end in sight anytime soon. So yeah, in relation to the actual stock, like for example, I've got a client who provides building materials, raw, raw building materials, like bollards and things like that. And rails and steel. Yeah. They're having issues supplying to their main clients for the first time in forever. And so they've got stock sitting in their warehouse. That has gone up in price overnight. Yeah. Because the demand is there. So as soon as demand is there, unlimited supply, economics dictates that the price goes up. That's an economy. That's how it works. Correct. And so my advice would be to ensure that you are insured for the correct amount.


Sandy 9:07 

And what can policyholders do to make sure they are adequately insured?


Felicity  9:12 

So I think the first step is to get in touch with your insurance broker. Yeah, just a plug for EBM. Yeah. And it is it is unfortunate that we are the ones that begin the conversation. What we would love to say going forward is clients or insurance actually contact us and say, hey, I've been thinking about and I've got my finger on the pulse. And am I adequately insured? I think as an insured, you have to take that responsibility. We are here to assist, of course, always, but it has to be in the forefront of our minds that the current climate, we all know what's going on. And so it's it does take out a responsibility on us. But just to have an updated appraisal at hand if that's possible. I mean, I've got many clients who are who in the past have never discussed or been interested in getting that done. But I think what we're saying is, you've got to ask the question as a business owner, that can I afford? If I'm under insured to not get a full payout? Yes. Because insurance won't pay out. That's the reality of what we're talking about. If you are under insured for that frugality, as you said before, if you are underinsured in insurance and not going to pay anything above that sum insured, I think it's worth getting an appraisal, because I'm seeing clients who have not done that in years. And it's just highlighted that there is under insurance out there. What they've had insured previously, and they go and have an appraisal, it's well below what is needed. Yeah, so we're seeing increases upwards of 40 50%. On some buildings that haven't been appraised for quite a while.


Sandy 11:02 

For business owners, can you provide a practical example of the potential effects of under insurance? Specifically relating to some insurance policies?



Yeah, certainly look, when I'm talking to insureds, I think the main thing that comes across is that many of them, they don't understand the ramifications of under insurance. And look, most policies, especially the ones that we've been talking about today, are all to do with property insurance. So you've got a building, you own a building, and you're insuring the actual physical loss of that building. And so what a lot of insureds don't know is that in most insurance policies, there is a coinsurance or average clause that is what is termed in the insurance industry. And basically, what that stipulates is that insurance, there is a bit of a buffer for under insurance for those people that have actually given a really good effort or in wanting to give a really good estimate of their rebuilding cost. Because like I said before, we are professional valuers we don't know. And a lot of insurance don't know the value of their buildings, especially in times that we're living in right now. Because the rebuilding costs go up and up and up. And so there is that there is an 80% coinsurance in most of the insurance policies, which says that there is that buffer, you don't have to be 100% correctly insured, but anything under it. That's why we get into dangerous territory. And so an example of that, as a business owner, if you have an in building that you've insured, and it's actually worth, you know, 200,000, and you've only insured it. So for 50%, not the 80% that, that you that you need. The insured, you basically said to the insurer that I'm going to co insure that that other 50% that under insurance motion that I've elected to, so in the event of a partial loss or a total loss, you're actually you've said to the insurer, I'm going to wear half of that that the cost of that claim because I haven't insured for the full amount. So I think that's that's a really good question for business owners to ask themselves.


Sandy 12:47 

Now Felicity for someone who admitted they hadn't prepared for this; I think you've done a phenomenal job. So thank you very much for providing an overview of his very current topic within insurance. Do you have any final thoughts for our listeners?


Felicity  13:00 

Look, I would say for myself included, take a look at your current schedule of insurance and just have the conversation. Have a real think about if you're insured correctly. And if you have any questions, contact your broker, contact the bank, contact an appraiser and say, Hey, I noticed that the rebuild costs and the current climate that we live in right now, am I going to be insured correctly? Am I insured correctly? And it's a question that I think needs to be asked ongoing, not just when the renewal comes up.


Sandy 13:33 

Correct. Okay, so to our listeners, if you have any questions, please reach out to the EBM team on                      1 300 755 112 or visit EBM.com.au. Thank you, Felicity. Thanks, Sandy.


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