Expert Insights on Navigating Property Valuation Challenges After Inflation

Property valuations often don’t reflect reality – especially after the recent inflationary period.

Inaccurate valuations mean grave consequences for businesses, such as unreliable loss expectancies, and claims that may not cover replacement costs or rebuilding expenses. Meanwhile, carriers have become more meticulous on valuations due to higher construction costs and a challenging property insurance market.

Still, it’s an open secret that many companies have inaccurate valuations without clear plans to get them in order.

We explored the topic in a recent webinar titled Inflation and Property Valuations: Aligning Assets with Reality. Hundreds join us – from risk managers to insurance carriers to brokers – proving that it truly is a big issue. 

Here are five key insights from our discussion:

1.  Accurate valuations lead to better risk strategies

Accurate values protect your assets and help you properly quantify your risk profile. With proper transfer terms, risk modeling, exposure costs, and accurate loss estimates, risk managers can make data-driven decisions — and insurance placement gets much easier.

“Reporting values is one of the first pieces of information you give to insurance companies, and it helps create a trusting relationship between your company and the insurer. If you’re underinsured, it can leave the policyholder with only a fraction of the cost to repair or replace their damaged property,” said Justin Chen, Global Manager of Property Valuation Services at Global Risk Consultants.

2.  Valuations are critical in any market

The hard property insurance market led carriers to look at risk management programs much more closely. Meanwhile, recent inflation showed carriers that if valuations aren’t up to date, they’re likely inaccurate. Those two macroeconomic trends made it even more important to get valuations in line with reality. But valuations are critical in any market.

“It underscores the importance of creating and maintaining a valuations process specifically designed for building replacement cost. It is critical to account for construction cost changes year-over-year to deal with unexpected and challenging economic factors, so risk managers aren’t caught off guard,” said Frank Francone, Senior Director of Risk Management at Brookfield Properties.

3.  Conduct valuations exercises often

Do an onsite appraisal every 5-7 years to set a baseline. Maintain those values with annual desktop appraisals that utilize industry-specific indices, loss prevention reports, and publicly available data. (Google Earth is a helpful tool to examine buildings and get estimated measurements.) Call vendors to understand current pricing and keep a solid inventory database.

“While desktop appraisals are becoming more accurate, on-site appraisals are still best,” said Chen. “That’s because we can examine machinery and equipment, have discussions with plant personnel, and have trained people walk through a facility to find red flags.”

4.  Common mistakes derail the valuations process

Valuations mistakes include not having a truly dedicated valuations process, not using proper cost indices, and applying a price per square foot in one region to another. For instance, the same building in Peoria, Illinois will cost much less to rebuild than one in New York City.

Another problem is basing valuations on market values or past accounting records.

“Using past accounting records for market value to create building replacement costs is a common mistake,” said Francone. “Construction costs increase over time, and you need to account for those changes year-over-year to gain a reliable account of our true property valuations.”

5.  Develop a valuations roadmap to valuations

Keeping valuations accurate is not a one-time engagement. It’s critical to have an ongoing process that examines your SOV, market data, client data, and market indices so valuations don’t go obsolete. Determine which facilities need in-person inspections now and which need desktop assessments — then develop a schedule that ensures each facility gets an in-person appraisal every 5-7 years.

“Staying up to date gives you the ability to present your program with confidence to insurance markets to show you’re being proactive and not letting valuations get obsolete over time,” said Charlie Carriker, Strategic Sales Manager for Project Services at Global Risk Consultants.

Want to watch the webinar? Click here: Inflation and Property Valuations: Aligning Assets with Reality

Want to contact us about your property valuation needs? Click here.