Underinsurance of Real Estate: A Threat to Policyholders and Insured Entities

The aim of the article is to demonstrate the risk of underinsurance in selected production halls used for business activities in the Czech Republic by means of a case study. The case study determines the insured value in the new price category for three selected production halls. New price is a specific term for property insurance in the Czech Republic and means the replacement value of the property. The cost method of valuation is used to calculate the new price. The insured value is determined by an insurance broker, and two brokerage companies were approached for this purpose. The replacement cost is determined by the independent property appraiser using the valuation decree applicable from 1 January 2024. The case study compares the calculated new prices, assesses their level in terms of the risk of underinsurance and then makes a suggestion of problem areas that should be addressed in the Czech Republic, as they put the policyholder at risk. The results of the case study show an asymmetry of information between the policyholder and insurer. This is due to unavailable or unclear, yet very important information for the policyholder. In order to reduce information asymmetry and the occurrence of underinsurance, it seems important that all insurers follow an explicit procedure leading to the determination of the insured value, which would be known to the policyholder prior to the conclusion of the insurance contract. It seems appropriate to use the current valuation decree, which has been updated annually in the Czech Republic for 35 years, for the procedure of determining the insured value.