It’s no secret that property values are on the rise. Because property premiums are based on the reported value of the property, many insureds may be tempted to manage premium spending by submitting flat property values. While that tactic can offer premium stabilization in the short term, it actually works against the longer-term best interests of both the insured and the insurance industry. Relying on flat property values instead of updated values ultimately results in insureds being hit with significant price increases all at once when underwriting requests an updated appraised value based on market conditions. Relying on outdated valuation data means premium hikes hit much harder at renewal than they would if an insured reported more current values year over year, which would result in more incremental premium increases as property values rise over time. It’s also essential to make sure property values are current. Should a catastrophe strike, an underinsured business may not have sufficient funds to rebuild or make it through an extended shutdown.
Recent losses, including the June 2021 partial collapse of the Champlain Towers South condominiums in Florida and the winter storm that froze Texas earlier in the year, led to substantial property claims, heightening market concerns around underinsured properties.1 Insurers are now taking a harder line against static property values, basing recoveries on reported values and modeling results to check the current accuracy of submitted values against carriers’ anticipated results. Providing more current values better protects insureds and promotes the long-term health of the insurance industry. Whether it’s property values or business income, providing more current valuation data is crucial to help insureds achieve the best results on their insurance programs.
IT’S NOT JUST ABOUT PREMIUMS
The impact of ITV reaches far beyond premiums. It’s also generating changes in program structure and the basis for declinations with many underwriters. Traditional excess markets scrutinize reported values before signing on to any shared or layered programs. More insurance policies are written with hard caps, scheduled limits, or clauses tying payment to reported values. For instance, insurers may use a margin clause that limits an overall payout to 120% of reported values. That is particularly true for classes of business in more challenging markets, particularly habitational, high-hazard manufacturing, and recycling. In the past, insureds may have been able to obtain recoveries well above reported values, but underwriters are taking a much harder line today and using software to double-check estimated values and costs at every renewal. Reinsurers are also pushing their cedants to better assess, manage, and price risk due to valuation concerns. This leads to reduced capacity and increased net retentions for carriers which puts further pressure on rates.
KEY ITV CONSIDERATIONS FOR PROPERTY COVERAGE
Of course, values go down and up, both for the property and business interruption components of the coverage. The steep economic downturn caused by the COVID-19 pandemic, for instance, caused massive drops in business income and employment. Because business interruption coverage is underwritten based on payroll and income, as some struggle to return to more normal levels of operation, changes in those areas should also be reflected in submissions to make sure premium dollars are allocated appropriately, so clients aren’t paying for a level of coverage that doesn’t reflect their true risk.
All insureds with exposures to catastrophic natural hazards are highly dependent on catastrophe modeling results, which underwriters use to define loss expectancies and the resulting premium for catastrophe coverage. This is becoming a key component of property placement submissions. Modeling results are also, in many cases, a driving factor not only in the pricing but in market participation as well as terms and conditions. Many insureds also use modeling results to determine the limits they choose to purchase and/or decide how to structure their risk transfer or retention program.
Other considerations for replacement costs should be included when determining ITVs. Inflation, which hit 8.5% in April 2022, is also playing a role. Supply chain snarls and labor shortages are causing material shortages and delays, driving the cost to repair or replace damaged property higher.1,2 Architect and engineering fees should also be included, along with construction and administrative costs that may be essential to rebuilding or repairing a property. In addition, changes in building codes can significantly add to construction costs. For example, in areas where building codes have been strengthened to make buildings more resistant to hurricanes, the cost of replacing an older, existing building could be much higher.
WHAT CAN INSUREDS DO?
Insurers need to obtain accurate insurance-to-value (ITV) calculations to assess adequate premiums for the risk assumed. However, with so much emphasis on building “value” and the insured’s preconceived understanding of the building’s value, choosing the proper limits can feel daunting. Providing the most current valuation data yields better results in terms of premiums and the marketability of a placement. Due to the pandemic and subsequent economic fallout, it’s likely been three years or more since many insureds have completed a property appraisal. Proactively obtaining an updated appraisal in advance of renewal can help support fair market negotiations and ensure adequate limits are obtained. Underwriters are more open to considering submissions with the most up-to-date valuation data. More current values also enable carriers to properly price coverage, ensuring that clients secure adequate funds to rebuild or replace damaged property.
HOW CAN AGENTS HELP?
Agents that help clients navigate value changes by taking a proactive approach and enabling clients to understand what they should do next will stay ahead of the pack.
Lead Proactive Client Discussions. Make it a point to schedule mid-term meetings with clients to help set expectations well ahead of renewals. Together, agents and brokers can add value for clients by providing information about how these changes can threaten a company’s viability. While a shortage of building materials and increased prices don’t directly affect insurance pricing, clients will see costs rise as they increase reported values and insurance limits to achieve adequate coverage. Unfortunately, it can be challenging for policyholders to wrap their minds around the higher cost of rebuilding after a devastating event, and some are balking at increasing limits in favor of hoping they don’t experience a loss. Agents can help reduce confusion by explaining the potential consequences of that choice and then complete due diligence by documenting client discussions and any declination of increased coverage.
Review Reported Values & Rebuilding Cost Estimates. Consider collaborating with clients to determine when the most recent appraisal was completed and discuss the benefits of providing current valuation data with insureds. It may also be good to encourage clients to reassess business interruption coverage limits to ensure adequate coverage is in place, should the rebuilding process take longer than anticipated.
Discuss Supply Chain Alternatives. The market for materials and labor is expected to remain under pressure for at least the next several months. However, if additional supply chain pressure results from natural disasters such as hurricanes, wildfires, or flooding, then the current state of the market will be even more prolonged. Agents should encourage clients to develop sourcing and procurement backup plans for materials, equipment, and resources.
Re-evaluate Policy Terms and Conditions. Clients and agents should collaborate to confirm that policies include appropriate policy limits and/or sub-limits so that policyholders don’t end up underinsured or hit with co-insurance penalties.4
Property exposures cannot be adequately managed without a current and complete picture of a property’s value. The best way to obtain the most cost-efficient coverage is to provide the most up-to-date property value information, reduce modeling uncertainty, and achieve premium credits by providing more comprehensive information. In short, insureds who proactively explain their valuation and work with markets on fair compromises may be able to offset what a potential rate increase would have been with the value increase and, more importantly, obtain more adequate coverage. Brokers with expertise in assessing property risk using sophisticated modeling systems can provide better guidance in identifying the data needed to adequately manage risk. Contact your CRC Group producer to learn how we can help your clients protect their assets in the event of property damage.
- David Pagoumian is the President of the CRC Red Bank, NJ office. David specializes in property placements and is an active member of the Property Practice Advisory Committee.
- Chris Carlson has more than 15 years of experience in Global Property Insurance and is the Director of CRC Group’s Property Practice.
- Viewpoint: Putting a Value on Property, Business Insurance, March 4, 2022. https://www.businessinsurance.com/article/20220304/NEWS06/912348172/Viewpoint-Putting-a-value-on-property-
- U.S. Inflation Calculator, Current U.S. Inflation Rates 2000 – 2022. https://www.usinflationcalculator.com/inflation/current-inflation-rates/
- U.S. Commercial Property – Statistics & Facts, Statista, April 8, 2022. https://www.statista.com/topics/1073/commercial-property/
- Insurance Implications of Rising Building Costs, Insurance Journal, June 14, 2021. https://www.insurancejournal.com/blogs/the-hanover/2021/06/14/618400.htm