LATVIA: insurance indemnities often do not cover renewal of the existing property

26 October 2021 — Marina MAGNAVAL
The study conducted by the Ministry of Economics on the changes in labor and construction material costs in 2021-2025 indicates that construction costs will increase by a record 6.6% in 2021 compared to 2020, reaching the highest increase in 9 years.

Such inflation will also affect those residents who do not build anything, as the amount of insurance indemnity received in case of property damage won't be sufficient to cover real construction costs, the Latvian insurers association said.

Due to the Covid-19 pandemic, volume of construction in Latvia has significantly increased. According to a study of the Ministry of Economics, in the construction of residential and non-residential buildings in 2021 alone, an increase in the cost of construction materials of 14.7%-14.8% must be taken into account. There is also an increase in labor wages and demand in the construction sector in other European Union (EU) countries.

According to the Central Statistical Bureau, only in the month of August, prices of construction materials increased by 12.8% y-o-y. The costs of construction materials are most significantly affected by the prices of metal and timber, as well as total volume of construction. Construction industry experts point out that trends will not change. In addition, price changes will affect not only those who are currently building or buying real estate property, but all real estate owners.

'When changing an insurance contract, the same insurance amount of property is often kept as it was when the insurance contract was concluded for the first time. However, previous insurance amounts no longer correspond to real construction prices. Consequently, if an accident occurs and the property is insured for too low a value, insurance payment does not cover all corresponding losses. Thus, families, as well as companies that have suffered losses, for example, in the event of a fire, will not receive full amount of property renewal", comments Raitis CAKLIS, Head of Risk Underwriting at ADB Latvia Branch of Compensa Vienna Insurance Group.

The expert emphasizes that it is important when concluding an insurance contract to make sure that the sum insured of the property is sufficient to restore the property to the condition it was in before an accident occurred. "Currently, we see that restoration of property damaged by floods, fires or other accidents has become much more expensive. Finding a construction company that will restore the property for less than EUR 1,000 per square meter is very difficult. In its turn, if the policyholder's insurance amount is EUR 700 per square meter, he will have to cover 30% difference himself, thus significantly increasing his financial burden", explained Raitis CAKLIS.

In order to avoid the risk of incomplete insurance, policyholders should review existing insurance policies and make sure that insurance amounts are sufficient based on the changes in the construction market. It would also be desirable not only estimate how much it would cost to renovate a property today, but also to consider natural inflation and increase of the sum insured in advance, by an average of 5-10% of the current value of the property renovation, the expert stressed.

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