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Figures from the Office for National Statistics (ONS) showed the annual rate of inflation in the UK as measured by the consumer price index (CPI) rose unexpectedly to 3.8% in July and is forecast to reach 4% by the end of the year. Now at its highest level in 18 months, this increase is serving as a stark reminder to businesses that price pressures remain volatile.  

At Charterfields, we specialise in insurance valuations, for property, plant, machinery and contents. As an Aviva Specialist Partner, we see first-hand how inflation distorts values and increases the risk of underinsurance. Our latest Underinsurance Report highlights the scale of the problem, and the risks it poses.

In this article, we explore some of the long-term impacts rising inflation, foreign exchange movements and tariffs are having on costs, and what this could mean for policyholders.

How inflation affects insurance valuations

Inflation means that labour, professional fees, permit costs, building materials and plant and machinery are all getting more expensive.

This is why underinsurance is often called the “silent risk”. Organisations think they have cover, but in reality, cost inflation can leave them exposed should disaster strike. Keeping declared values static over several years makes this risk acute, stretching the gap between declared values and true reinstatement costs.

The risk of underinsurance

Underinsurance isn’t just a statistical problem; it’s a financial pitfall that many businesses only discover after suffering a loss. 

Our 2025 Underinsurance Report highlights the scale of this issue for businesses:

  • 88% of properties inspected were underinsured.
  • More worryingly, 35% had building values less than half of reinstatement cost.
  • In 77% of locations the declared values for plant and equipment was below reinstatement cost.
  •  For 41% of locations the plant and equipment was insured for less than half of the actual reinstatement cost.

The consequences extend beyond immediate cash shortfalls:

  • Business continuity risks – Without a full and prompt settlement after an insured loss, business recovery could be delayed or even unachievable 
  • Financing issues – Lenders may withhold or withdraw support if assets are inadequately insured.
  • Reputational damage – Suppliers, clients, and investors may lose confidence if operations cannot resume quickly.

In short, underinsurance is not just an insurance problem, it’s a strategic risk to the entire organisation.

What does this mean for policyholders?

Claims settlement risks

Most policies include an “average” clause, meaning that if assets are only insured for half of their true value, any claim payout may be reduced by 50%. Even a partial loss can leave businesses with significant unfunded costs.

Imagine a manufacturer whose building is insured for £5 million but actually costs £10 million to reinstate. If a fire causes £2 million of damage, the insurer will not cover the full £2 million. Under the “average” clause, the claim payout is reduced in line with the level of underinsurance (in this case, by 50%). The business would only receive £1 million, leaving a £1 million shortfall to fund themselves.

Premium increases vs. coverage gaps

While increasing declared value can sometimes mean an increase in premiums, underinsuring to keep costs down is a false economy. The gap between cover and true reinstatement cost leaves organisations financially exposed.

Compliance & governance

Underinsurance isn’t just a financial risk. It can create governance issues, too. Directors may face scrutiny or liability if assets are knowingly or negligently underinsured and the business cannot recover from a major loss.

5 practical steps to protect your organisation

Rising inflation does not mean having to leave your organisation exposed. The following steps can significantly reduce risk and strengthen financial resilience:

1. Commission independent reinstatement valuations

Declared values are often based on book costs or outdated estimates, not the true reinstatement cost. Independent assessments, as provided by Charterfields, deliver objective, evidence-based figures that insurers recognise and can rely upon.

For buildings, this means capturing not just construction costs but also allowances for demolition and debris removal, professional fees and compliance with the latest building regulations.

For plant, machinery and contents, it means factoring in specialist contractors, exchange rates and installation costs.

2. Review policies regularly

A “set and forget” approach leaves cover eroding over time.

Best practice is a formal review at least every three years, but in high-inflation environments, annual reviews or even mid-policy checks may be necessary.

Key additional trigger points include completion of major capital projects, new acquisitions, or upgrades, which can significantly alter total reinstatement costs.

3. Understand indexation limits

Index-linked adjustments can create a false sense of security. If indexation is capped at 3% while real-world costs for construction or machinery are rising at double digits, you could be quickly underinsured.

Ask your broker or insurer how indexation is applied and whether it reflects sector-specific inflation trends.

4. Engage specialist expertise

Plant, machinery and production equipment are often the most complex assets to assess and the easiest to overlook. General property valuations rarely capture these correctly.

Ensuring assets are correctly allocated between categories in insurance coverage requires knowledge of the appropriate demarcations and reconciliation with insurance policy terms.

5. Access independent data and benchmarks

Use sector-specific insights to benchmark your position. For example, our annual Underinsurance Report highlights trends across industries and asset classes, giving you context to challenge assumptions and plan effectively. 

Conclusion

Inflation is not just an economic headline. It can have a direct impact on the protection your insurance provides. Rising reinstatement costs mean gaps in cover are widening, and the risks of underinsurance are greater than ever.

To safeguard your organisation, it’s key to ensure your insurance values are accurate, regularly updated, and based on expert assessment.

Contact Charterfields today to book a valuation or request more information on the Underinsurance Report.