Global Conflict, Rising Costs & Underinsurance Risks for UK Businesses

Ongoing global conflict continues to dominate headlines, but for many UK businesses, the most immediate impact is not geopolitical – it’s financial and operational. Rising costs, disrupted supply chains, longer lead times and inflated material prices are creating a perfect storm of risk that many organisations are unknowingly exposed to through underinsurance.

Across multiple sectors, we are seeing the cost of raw materials, equipment and machinery increase significantly – with one of our clients reporting that the cost of their raw materials was up to four times higher than just a few months ago! At the same time, delays in sourcing stock, spare parts and specialist machinery are becoming more common, increasing downtime and putting pressure on cashflow.

Yet many insurance policies have not been updated to reflect these changes.

In this article, we explore how current global conflict is affecting UK businesses, why underinsurance is becoming more widespread, which industries are most exposed, and what businesses can do now to protect themselves.

 

How Global Conflict Is Affecting UK Businesses

While the causes may be international, the consequences are being felt very close to home.

 Key knock‑on effects include:

• Rising cost of raw materials (steel, timber, plastics, energy-intensive products)
• Increased cost of machinery and equipment
• Extended lead times for replacement parts and specialist items
• Supply chain disruption, particularly for imported goods
• Increased transportation and shipping costs
• Longer shipping times
• Greater reliance on fewer suppliers, increasing vulnerability

For insurance purposes, these pressures significantly alter the value of assets, stock and potential business interruption losses, often without businesses realising it.

 

What Is Underinsurance?

Underinsurance occurs when the sum insured on a policy is lower than the true cost of replacing, repairing or reinstating assets, stock or turnover.

This can affect many areas of cover, including:

• Buildings
• Contents
• Plant and machinery
• Stock
• Business interruption (gross profit or revenue)

Underinsurance is rarely deliberate. It often happens gradually as costs rise, businesses grow, or operations change, especially during periods of economic volatility.

 

Why Underinsurance Is a Serious Problem

One of the biggest misconceptions is that underinsurance simply means a smaller payout. In reality, it can have far more severe consequences.

Average Clause Explained (in Plain English)

Most commercial insurance policies contain an average clause. This allows insurers to reduce a claim payout in proportion to the level of underinsurance — even if the claim itself is relatively small.

Example:

• True replacement value of machinery: £400,000
• Sum insured on policy: £200,000
• Business is insured for only 50% of the true value

If a claim occurs for £100,000, the insurer may only pay £50,000, leaving the business to fund the shortfall.

This can be devastating, particularly when businesses are already under financial pressure due to rising costs and disruption. Average can also be applied to Business Interruption sections of cover

 

Why Underinsurance Is Increasing Right Now

The current environment has accelerated underinsurance risk for several reasons:

1. Rapid Inflation of Costs
Many businesses review insurance annually, but cost increases have been happening much faster than renewal cycles.  A sum insured that was accurate 12–18 months ago may now be significantly out of date. Even 6 month old calculations could require review to ensure adequacy

2. Volatile Material Prices
For some clients, the cost of raw materials has increased significantly. This has a direct impact on:

• Stock values
• Cost of reinstatement
• Business interruption exposure

3. Supply Chain Delays
Longer lead times mean longer periods of downtime following a loss, increasing business interruption losses beyond what policies may currently reflect.

4. Changes Made Incrementally
Businesses often add new machinery, increase stock levels or take on larger contracts gradually, without realising how much overall exposure has changed.

 

Which Businesses Are Being Impacted the Most?

While almost all sectors are affected to some degree, some industries face significantly higher risk.

 Most exposed sectors include:

• Manufacturing and engineering
• Construction and building trades
• Wholesale and distribution
• Automotive and transport
• Retailers holding large stock volumes
• Food production and processing
• Businesses reliant on imported materials or specialist machinery

These businesses often rely on complex supply chains, expensive equipment, and time‑sensitive operations, making them particularly vulnerable to both underinsurance and disruption.

 

The Impact on Stock Sums Insured

Stock values are one of the most commonly underinsured areas we see.

Rising costs mean that:

• Replacement stock costs far more than expected
• Seasonal peaks may exceed declared limits
• Import delays require higher stock holding levels

If stock sums insured are not reviewed and adjusted, a major loss such as fire, flood or theft could leave a business unable to restock fully, impacting trading ability and customer confidence.

 

Business Interruption: The Hidden Risk

Business interruption (BI) insurance is designed to protect revenue or ‘insurable gross profit’ following an insured loss.  However, it is frequently underinsured because:

• The wrong calculation has been used (accounting gross profit is used instead of insurable gross profit – two very different things!)
• Turnover has increased
• Costs have risen
• Indemnity periods are too short
• Supply chain delays extend recovery times

Real‑world consideration

If machinery now takes six months longer to replace due to global shortages and shipping delays, but the policy only allows a 12‑month indemnity period, businesses may run out of cover before they are fully operational again.

 

The Importance of Business Continuity Planning

Insurance is only one part of resilience.  Business continuity planning is more important than ever in the current climate.

Key considerations include:

• Identifying critical suppliers
• Assessing single‑source dependencies
• Planning alternative sourcing options
• Understanding realistic recovery times
• Reviewing contingency arrangements
• Wholesale review of any previous BCP’s and if key elements require adaptation to current conditions

Businesses with strong continuity planning are better positioned to recover quickly, and to structure insurance appropriately.

 

The Value of Alternative Suppliers

Where possible, having backup suppliers can significantly reduce risk.

Even if alternative suppliers are more expensive, the ability to continue trading can outweigh increased costs.  From an insurance perspective, demonstrating robust supply chain management can also support claims and recovery strategies.

 

Practical Steps to Reduce Underinsurance Risk

The good news is that underinsurance is avoidable with proactive review and communication.

We recommend businesses:

• Review sums insured regularly (not just at renewal)
• Factor in current replacement costs, not historic values
• Consider professional valuations for buildings and machinery
• Review stock levels during peak periods
• Reassess business interruption calculations
• Notify your broker of any significant changes

Small updates made early can prevent major financial exposure later.

 

How We Can Help

As independent insurance advisers, our role is to help clients understand risk in plain English and ensure cover remains appropriate as conditions change.

We work closely with clients to:

• Identify underinsurance risks
• Stress‑test sums insured against current market conditions
• Review supply chain and business interruption exposure
• Ensure policies reflect real‑world replacement costs

In uncertain times, advice and communication are more important than ever.

 

Underinsurance at a Glance

Area of Cover	Common Issue	Potential Impact
Buildings	Outdated rebuild cost	Reduced claim settlement
Machinery	Increased replacement cost	Significant uninsured loss
Stock	Inflation & peak levels	Inability to restock
Business Interruption	Insufficient sums or indemnity	Extended loss of income
Supply Chain	Single supplier reliance	Longer recovery time

 

Frequently Asked Questions

What should trigger a review of my insurance?
Any significant change, including cost increases, new machinery, higher stock levels, or longer lead times, should prompt a review.

Is underinsurance checked at claim stage?
Yes.  Insurers typically assess adequacy of sums insured at the time of a claim, not just at inception or renewal.

Can I update my sums insured mid‑policy?
In most cases, yes.  It’s far better to update cover during the policy period than wait until renewal.

Does inflation protection solve the problem?
Index‑linking helps, but it may not keep pace with sharp or sector‑specific cost increases.  It should not replace regular reviews.

What if I’m unsure of replacement values?
Your broker can help, and professional valuations may be recommended for higher‑value assets.

 

Global conflict and economic instability are creating challenges that extend far beyond supply chains and pricing – they are reshaping risk itself.

Underinsurance is one of the most significant, yet often overlooked, consequences.  Without regular review and open communication, businesses may only discover gaps in cover when it is too late.

Taking proactive steps now can protect not just assets, but long‑term stability and resilience.

If you’re unsure whether your current insurance still reflects today’s reality, now is the time to review it.