Insureds have historically found it tricky to get an accurate assessment of assets, especially when it comes to determining replacement costs for rebuilding or repairing large commercial properties. Factors such as basic inflation, materials costs, building codes and changing Federal and State regulations can make it difficult for insureds to keep current with their valuations.
However, failure to do so can have a significant impact on a business’ ability to fully recover after a loss occurs. Insurance carriers also focus a great deal of effort on valuations. “The stakes are high to get values right across their portfolios” said Andy Simmons, head of Large Property at The Hartford. “Insurers charge a premium for the risk they’re accepting. That risk must be valued correctly to ensure the right premium is being charged for the exposure. Failure to do so could lead to under-funding and ultimately weaken the financial stability of the organization.”
The Coronavirus Effect
The economic upheaval from COVID-19 has made determining replacement costs exceptionally difficult. Like so many industries, the pandemic has sent the construction industry into a tailspin, significantly driving up materials costs. In fact, according to an analysis by the Associated Builders and Contractors, lumber alone saw an increase of 11% in June 2020. Added to this, coronavirus-driven shutdowns and interruptions have impacted the entire construction industry.
“So many businesses have incurred losses due to an inability to even get contractors on site,” said Simmons. “This contributes to delays in property construction and repairs, which obviously have an effect on business income too.”
The fluid environment, resulting cost fluctuations and high stakes for insurers mean they are even more closely scrutinizing stated asset valuations and addressing businesses that are out of step. Clearly, it’s more critical than ever for businesses to ensure accuracy in their asset valuations.
Partnerships With Brokers and Insurers Emerge as Most Important First Step
Asset valuation is not easy to get right, especially when costs are a moving target. But businesses can help avoid the fallout from not taking action by partnering with a trusted and knowledgeable agent/broker or a professional appraiser. Indeed, Simmons says that turning to the experts should be the first step when faced with a challenge like asset valuation. “With in-depth experience in specific areas of the commercial insurance space, such as technology, real estate or hospitality, these professionals speak the language of your industry and understand the unique challenges you face,” he said. “They’re the best resources to track fluctuations in the market and note changes in replacement costs that can affect asset valuations.”
As part of this, an agent/broker can also help navigate business income (BI) worksheets by pinpointing things like gross earnings ratios and what they should look like. “BI worksheets are important tools, but they’re not easy to complete,” said Simmons. “A broker can help a business fill out the worksheet to ensure better accuracy.” Partnering with an insurance carrier means businesses have access to risk engineering consultants as well, who can shed light on a specific property’s inherent risks.
Risk engineering consultants can also provide input to build the all-important business continuity plan, which can be used to set values for any given situation, mitigate or lessen potential loss, and get a business up and running again after an issue arises. “No business owner wants to have to rely on their insurance to cover a loss, but if it happens, they want to get back to business as soon as possible,” said Simmons. “That’s where a robust business continuity plan comes into play.”
The Hartford Is Here to Help
The current chaos ignited by the pandemic has certainly increased insurers’ scrutiny of their business customers’ asset valuations. And, because of continued uncertainty, it will remain a focus for the foreseeable future. It’s equally in the interest of policyholders to capture accurate values in this changing environment to mitigate the risk of underinsured losses and ensure continuity for years to come.
A partnership with The Hartford can help. “With more than 200 years in the industry, The Hartford is perhaps the best ally for large-property owners across industries,” said Simmons. “Our underwriters and risk management teams understand the importance of getting values right. It’s that level of dedication to our customers that will keep their businesses protected no matter what the world throws at them.”
This article appeared in the March, 2021 issue of National Underwriter.
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