Viewpoint: Putting a value on property

Commercial property policyholders are being asked to ensure their reported values are accurate. This is not a surprising development. Brokers and risk managers for several years have reported that valuations were coming under increasing scrutiny. But now there is a laser focus on the issue.

As we report here, recent losses, such as the partial collapse of the Champlain Towers South condominium building in Surfside, Florida, in June 2021, have heightened market concerns about underinsured properties. The winter storm and freeze that hit Texas and large swaths of the U.S. a year ago also led to a substantial volume of property claims for insurers. Consecutive years of above-average losses from natural catastrophes have been costly. Some $120 billion of the $280 billion in losses caused by natural disasters in 2021 were insured, according to Munich Re, and the U.S. recorded the largest share of insured losses at $85 billion.

With these levels of claims, it’s understandable that insurers, as part and parcel of their overall return to underwriting discipline that has accompanied the hardening market, would focus on values. After all, it’s in the wake of an extreme weather event or a fire or other disaster when the adequacy, or not, of values comes into full view and insurers find out whether their predicted potential loss has been understated and whether they collected enough premium. For policyholders, finding out that their values were inaccurate after a loss may result in their being underinsured and not being made whole.

So why not report values accurately? A couple of different explanations come up. While policyholders may not intentionally underreport values, they may have trouble fully understanding their risks, especially after the financial effect of the pandemic and as many have reshaped their businesses to survive. Inflation, currently running at 7.5%, is also playing a role. Supply chain issues are causing shortages and delays, which are driving construction costs higher. In the event of a total property loss under these conditions, the cost to replace damaged property with material of comparable kind and quality is going to be higher — something that many property owners may not have factored in. Finally, it takes time for practices perhaps considered acceptable in a soft insurance market to get resolved. Historically, some policyholders may have looked to place their business with as low a valuation as insurers would accept in order to get as cheap a rate as possible, and as rates and premiums started to rise, some may have understated values to cut their insurance costs. That approach is clearly not going to fly any more. 

Logic would suggest that accurate values make sense for everyone. A few years back, I was talking to a risk manager in New York who made the point that when companies understate their values, those that do report to value pay the price because they are effectively subsidizing the market. Policyholders also have an obligation to report their values as accurately as possible. Representing their risk transparently to insurers should be part of any sound risk management program.

Unfortunately, after several years of rate increases and tightening terms and conditions, businesses may find the additional substantiations that insurers are requiring on valuations hard to stomach. Recent losses suggest there is a disconnect in the market on this issue, and risk managers, brokers and insurers need to work together to connect the dots.