Underinsurance: a risk perception problem, not just a data problem

BCIS executive director Rich MacLean explores the role that risk perception plays in underinsurance in buildings cover.

In discussions about building insurance, underinsurance is often framed as a technical issue.

Was the valuation accurate?
Were all rebuilding costs included?
Was the right index used to keep the figure current?

These are important questions, and they often sit at the centre of industry discussions about underinsurance. But underinsurance is rarely caused by a single point of failure. In practice, underinsurance often starts much earlier than the point at which the sum insured is set, with how the different people involved in insurance perceive the risk. This is partly because the sum insured can represent different things to different participants in the process.

For a policyholder, the rebuild cost may simply be the number that produces a premium that feels reasonable or affordable. For a broker, it may be the figure that appears defensible if a claim is ever challenged. For an insurer, it represents exposure across a wider portfolio of risks. For a claims team, it eventually becomes the number that is tested against the reality of reinstating a damaged property.

Each of these perspectives is rational in isolation; but they are not always aligned.

For surveyors and reinstatement cost consultants, the simple question of what would it cost to rebuild this building today is one that really depends on the information they are working from.

In recent years, construction costs have been shaped by a series of external shocks, from pandemic disruption to energy market volatility following the war in Ukraine and, more recently, more upheaval in the Middle East affecting global supply chains.

The impact of those pressures is not always immediately visible in headline measures. Without access to robust and regularly updated cost intelligence, there is a risk that rebuild assessments are influenced by partial signals, historic benchmarks or assumptions that no longer reflect current market conditions.

Ultimately, none of these perspectives on potential risk are wrong. But when they drift apart, the probability of underinsurance begins to increase.

The hidden influence of perception

Insurance works differently from many other financial decisions because the consequences of getting it wrong are not immediately visible. For most policyholders, the premium is the only tangible part of the policy they experience year to year. The sum insured can feel abstract by comparison and people naturally focus on the cost they see today rather than a potential shortfall that might only become visible much later, and only then if a claim occurs.

Assumptions can also develop over time. Some customers believe the insurer will ensure the numbers are correct. Others assume that automatic adjustments at renewal mean the figure must already be right. In reality, those assumptions are not always tested until a loss occurs.

Why this matters for the industry

The consequences of underinsurance extend beyond lost premiums and individual claims. Disputes can increase claims handling costs, affect customer satisfaction and create reputational or regulatory pressure. Even where a policy has been applied correctly, the perception of unfairness can still damage trust.

Addressing underinsurance is therefore not just about improving data or processes. It also requires recognition that different participants in the system often approach the same risk from different perspectives.

Starting with clearer conversations

If risk perception plays such a large role, the starting point has to be better communication.

Policyholders do not need to understand the technical detail behind rebuilding costs or valuation methodologies. But they do need a clear explanation of what the sum insured represents – and what it doesn’t – and why it matters. The goal is not to overwhelm customers with information. It is simply to make sure the number is understood.

Regulatory expectations are also pushing the industry in this direction. Under Consumer Duty, firms are expected to consider whether their communications genuinely help customers understand the products they are buying and the risks they are taking on.

That raises practical questions for insurers and intermediaries. Are teams working in silos when policies are set, renewed and serviced? Are assumptions being made about what policyholders already understand? Are key terms clearly explained and revisited over time? Improving communication does not require customers to become experts in insurance terminology. But it does require alignment to happen earlier in the process, before assumptions become embedded.

When a loss occurs, perception gives way to reality very quickly. At that point, the only number that matters is the one that reflects the true cost of putting the building back.

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