Property Valuation

FAQ: Insurance Asset Valuations

Ensure that claims pay for replacement costs or rebuilding expenses

Ensure that claims pay for replacement costs or rebuilding expenses

The effects of inflation have been well documented – from the rising cost of groceries to the decreased ability for consumers to save. For risk managers, inflation means property and equipment that is likely undervalued. That means businesses are at serious risk for insurance claims that won’t fully pay for replacement costs and rebuilding expenses. Plus, accurate loss estimates are critical for underwriting and risk modeling. In today’s hard insurance market, proper valuations could be the difference between smooth renewals and a carrier passing on your risk.

To examine the topic of insurance asset valuations, we teamed up with RIMS and Starr Tech for a recent webinar. We explored inflation’s effect on valuations; establishing credible insurable values through benchmarking and onsite appraisals; and how underwriters assess asset valuations. Watch the full presentation here.

After the webinar, we developed this helpful FAQ:


  • How has inflation affected insurance asset valuations?

    Rising inflation means commercial properties may be undervalued by 30% for underwriting purposes, according to a report in Risk & Insurance. Meanwhile, construction inflation has been between 12% and 40% per year since the pandemic, according to internal GRC data. Machinery and equipment rates have not increased quite as quickly, but still average 6% depending on industry.

  • Why has inflation affected insurance asset valuations?

    The lingering effects of COVID-19 caused an increase in construction costs and machinery equipment. During the pandemic, many skilled workers decided to retire. This shortage caused a supply/demand issue and increase of wages, and workers are demanding higher wages amid increased cost of living. Meanwhile, supply chain issues and tariffs on imported goods make it more difficult to get critical equipment. While inflation has stabilized slightly, it has not gone back to pre-COVID levels, according to GRC experts.

  • How has inflation and inaccurate property valuations affected insurance carriers?

    Values have increased more rapidly than insureds can appropriately adjust. At the same time, the insurance market is suffering losses out of proportion with premiums charged as valuations are increasing more rapidly than they are declared to the marketplace.

  • Which industries are most affected?

    Valuation challenges are affecting all industries, but projects in the food-and-beverage, and processing spaces are most effected. No matter the industry, companies with older equipment and assets can have additional challenges around replacement cost valuation.

  • How do underwriters view insured asset valuations?

    Underwriters see plenty of value in insurance asset valuations from independent entities. To determine if a valuation can help them determine proper coverage, underwriters ask the following questions:

    • Who is performing the valuation?
    • Are they a reputable source for completing valuations for the type of property they’ve agreed to assess?
    • Is what they have assessed relevant to the property we are being asked to insure? 
    • Are the locations they’ve selected key to the underwriting of the account?

    Specifically, underwriters want to be sure the valuation is done on a replacement cost basis. The market value of the property to be insured can be less than the cost to replace it, but the property policy most typically provides coverage on a replacement cost basis, so it is important it be valued that way.

  • How does a valuation specialist triage a large portfolio?

    Valuation specialists start by gaining a firm understanding the business. They take a high-level view of the statement of values (SOV) as well as building values and building price per square feet. They benchmark the SOV to expected in-house databases to find discrepancies. Next steps are desktop or on-site valuation studies – or a hybrid approach. It’s critical that methodology be developed in conjunction with the broker and insurance carriers on the program.

    Several factors influence the strategy like occupancy, time since last valuation, the need for further breakdown of assets on the schedule, recent capital projects to validate cost of similar assets, and the availability of internal resources to support the project. Many clients with large portfolios will focus on high-value locations or locations with the highest loss expectancy.

    Start early. For clients with large schedules updating the SOV can be a multi-year process.

  • Desktop vs. in-person valuations: which is better?

    It depends on the complexity, scope of work and accuracy of the valuation. Typically, a desktop valuation is best completed on buildings-only assignments and where information like COPE data and square footage can be found online or via satellite imagery. Also, indices are widely used to trend historical cost records to an estimated replacement cost at prices prevailing at a certain date. Using indices means understanding what the index represents and if it matches well with your assets.

    On-site valuations are more in-depth and accurate. With boots on the ground, specialists confirm construction data, learn about the condition of equipment, and can talk with workers to learn more. Underwriters generally prefer on-site valuations due to the greater level of certainty – although for large schedules of locations, desktop services add plenty of value.

  • How recent should property valuations be?

    Three years or under, particularly in times of high inflation.

  • What happens if a company is underinsured and has a sizeable claim?

    They run the risk of receiving only a partial recovery on their loss, which can result in added financial stress on the insured during an already difficult situation. In tightening insurance markets, underwriters are less willing to waive coinsurance. Where they have concerns about the values being reported, underwriters will apply an occurrence limit of liability, which limits the recovery to the stated value of the property on the SOV.

  • What are some common issues or mistakes to avoid when determining insurable values?

    The biggest mistake is thinking that the market value or acquisition cost of the property is the amount you should report. Instead, examine the cost of labor and materials to repair what’s been damaged. That can be much higher than the market value. For equipment, since policies usually permit replacement with like and kind, you can often report this at the current cost to acquire the same equipment in similar condition.

  • How do underwriters approach global valuations given currency fluctuations around the world?

    Policies are usually stated in U.S. dollars and for global programs there will often be coverage for a certain amount of currency fluctuation. The dollar has been stronger than many other currencies, so it has been less of an issue for U.S. insurers during this run of inflation.

4 WAYS INFLATION IMPACTS COMMERCIAL PROPERTY VALUATION AND INSURANCE

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