Because property premiums are based on the value of the property, many insureds have sought to save money over the years by reporting lower values. While that tactic can bring cost savings in the short term, it works against the longer- term best interests of both the insured and the industry. Should a catastrophe strike, a business that’s underinsured may not have sufficient funds to rebuild or make it through an extended shutdown.
In addition, insurers are taking a harder line against underestimates of property values, basing recoveries on reported values and using modeling results to check the accuracy of submitted values. Accurate values better protect insureds and promote the long-term health of the insurance industry. Whether it’s property values or business income, providing more accurate data is a better strategy to help insureds achieve the best results on their insurance programs.
More insurance policies are being written with hard limits, or clauses tying payment to reported values. For instance, insurers may use a margin clause that may limit overall payout to 125 percent of reported values. That is particularly true for classes of business in harder markets, particularly habitational, high-hazard manufacturing and recycling. While insureds in the past may have been able to obtain recoveries well above reported values, underwriters are taking a much harder line today and using software to double check estimates of values and costs at each renewal.
Of course, values go down as well as 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, changes to those need to be reflected in submissions. Where a client’s risk exposures change, adjustments should be made so that a client is not paying for coverage that doesn’t reflect their true risk.
All insureds with exposures to catastrophic natural hazards are highly dependent on the results of catastrophe modeling, which underwriters use to define loss expectancies and the resulting premium for catastrophe coverage. This is becoming a key component of every property placement submission. Modeling results are also, in many cases, a driving factor not only in the pricing, but in market participation and terms and conditions. Many insureds also use modeling results to determine the limits that they choose to purchase and/or how to structure their risk transfer or retention program. With so much at stake, it is highly recommended that the data is accurate from the very begining.
Other considerations for replacement costs should be included when determining ITVs. In the event of a catastrophe, costs for construction, labor and material are likely to rise due to increased demand and shortages of skilled workers, as well as supplies. Architect and engineering fees should be included along with construction and administrative costs that may be essential to rebuilding or replacement. Changes in building codes can add significantly to construction costs. In areas where building codes have been strengthened to make buildings more resistant to hurricanes, for instance, the cost of replacing an older, existing building could be much higher.
Providing the most accurate data yields better results, not only in terms of premiums, but also in the marketability of a placement. Underwriters are more open to considering submissions with the most up-to-date, accurate data. Insureds who underestimate or don’t properly assess their property values, place themselves at a long-term disadvantage. Accurate values enable insurers to properly price coverage and to provide insureds with adequate funds to rebuild or replace damaged property.
BOTTOM LINE
Risk cannot be adequately managed without a true picture of the risk. The best way to obtain the most cost-efficient coverage is to provide the most accurate information, reduce modeling uncertainty and achieve premium credits by providing better data. 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 for more information.
Contributors
- 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.