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Determining property value adequacy is one of the biggest challenges among both Insurers and Risk Managers alike.

A company’s Total Insurable Values – or TIV – should encompass the value of their real property, business personal property, and business income estimates. When calculated correctly, this valuation captures the size and scope of a company’s property exposures on a replacement cost basis (except for inventory which is typically at selling price) and serves as one of the primary factors driving underwriting decisions. This is generally provided to the company on the Statement of Values, or SOV.

The problem with relying on the SOV is that underwriters base their decisions on what the client is reporting, at times with limited resources to affirm or contest those values. Unless a figure is outlandishly low or high, it becomes difficult to question it, and doing so could potentially damage the overall relationship.

In today’s hardening market, there can be a real moral hazard to under report values in order to mitigate premium increases -- While it varies from one Company to another, North American property rates are up 25% - 35% this year, on average. Underreporting TIVs might yield a lower premium, but the downstream risks for insureds and insurers alike far outweigh any front-end savings.

The Consequences of Underreported Property Values
In the long run, inaccurately reported values do far more harm than good to a company’s bottom line.

Underwriters use reported values to determine how much capacity they want to deploy, where to attach on a particular risk, and what terms, pricing, and deductible structures are appropriate. Companies model, and price their catastrophe rates based off of the information provided on the SOV. Policies are only as good as an insurer’s ability to pay claims, and that’s only possible if they collect premium that is commensurate with risk they are taking.

Historically, “blanket” policy limits have provided Risk Managers with the comfort that if a mistake occurs on the statement of values, and a loss occurs, they will still be able to recoup the full amount of the loss. Unfortunately, these instances are becoming more frequent and insurers are pushing back. When a significant delta occurs between the reported values of a location, and the actual loss it has a material impact on underwriting process and can end up in litigation.

Here are three tips to help risk managers report accurate information and avoid the consequences of incorrect valuations.

It is also important to recognize that there is also reputational risk at stake, not just premium and claims dollars. If an Insurer can no longer trust the information that a company provides, it will impose stricter terms or deductible structures to provide themselves with more certainty regarding the risk they are taking. Risk managers may be forced to accept occurrence limit of liability policies, under which coverage is restricted to whatever value is reported, even if damages exceed that value. In short, they no longer get the benefit of a “blanket” limit policy.
Well-meaning risk managers might still submit inaccurate valuations simply because they lack access to tools, resources, and methodologies that produce more accurate numbers. After more than a decade in property underwriting, there are a few common missteps I’ve seen that can result in underestimated TIVs.

Fortunately, following a few best practices can fix these errors. Here are three tips to help risk managers report accurate information and avoid the consequences of incorrect valuations. 

1. Conduct third-party insurance appraisals 
A third-party appraisal is the gold standard in property valuations because it assures underwriters that the figures were determined by an experienced, unbiased professional.
Contract with a reputable appraisal company to obtain an expert and objective evaluation of your property. Look for a firm that adheres to the Uniform Standards of Professional Appraisal Practice (USPAP) and the Code of Professional Ethics and Standards of Professional Practice of the Appraisal Institute.

Ideally, an appraisal should be conducted every three to five years, with appropriate trending in between that accounts for asset depreciation, inflation and other economic, and geographical factors.

2. Utilize validated tools and reference guides
The next-best option to a third-party appraisal is the use of validated tools such as the Marshall & Swift Valuation Service cost manual. This guide references more than 30,000 component costs and includes multiple methodologies that can help risk managers estimate values for commercial structures and equipment replacement costs.

This tool is straightforward and widely accepted by insurers. It’s an excellent starting point when an outside appraisal isn’t feasible.

Another option is to use the cost of any new construction as a basis for valuations on existing properties, assuming your company has similar exposures throughout their portfolio. Reported replacement costs for older properties should align with the costs of constructing a similar property today.

Every organization should also utilize ISO business income worksheets to estimate business interruption loss potential. These worksheets are an industry standard that help to validate reported BI values.

3. Centralize and standardize reporting methodology
The compilation of a statement of values is rarely a one-person effort. Data may be collected and submitted by the company accountant, a real estate group, an outside contractor, the CFO, or all of the above. If a risk manager is relying on disparate teams to gather information, there must also be a way to apply a consistent quality standard across every channel.

This is especially helpful when trending values in between appraisals. For example, is everyone using the same index or calculation to determine inflation rate? Equations that incorrectly account for compounding inflation could result in estimates that are millions of dollars off from an accurate value. Over an entire portfolio of properties, this creates a material difference in exposure from an underwriting perspective.

Enforcing a standard will help to weed out such inaccurate or outdated information.

The Takeaway
The world is currently undergoing some drastic changes, and many companies will see changes in their property risk profile as their businesses adapt to the restrictions imposed by the pandemic. Economic effects will be felt for some time and hardening of the property market will continue. 
Despite these challenges, the best way to protect your business is to put in what can sometimes be difficult work, because over the long term you’ll be able to sleep better at night.


About the Author
Based in Philadelphia, Anupam Das is a Senior Underwriter with AXA XL’s North America Property team. He can be reached at anupam.das@axaxl.com.