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Perspective: Telling the truth about property valuations creates trust, promotes a sustainable market



It does not take much soul-searching to remember the basic moral lessons that many of us learned at an early age: “Do not lie,” “Do not steal,” and “Do not cheat.” But today, the headlines are plagued by stories of those who have forgotten these lessons. Unfortunately, unsustainable property insurance practices implemented by a few inadvertently affect the insurance market for many to a large extent.

This article will address the underreporting of property values ​​and the negative effects on the property insurance market, the importance of correct property valuations for policyholders and the steps they can take to maximize the benefits of true and correct replacement cost estimates for best-in-class balance. sheet protection.

Unsustainable valuation methods

Insurance companies rely on a diverse pool of funds that cover a variety of insurable interests to strengthen the possibility that one of them may incur a large loss. As long as everyone participates in good faith with true and correct values, insurers can charge appropriately to cover the risks for the wider group. Conversely, when the statement of value provided to an insurer does not reflect true and correct values, the insurer does not charge enough premiums to cover the risks it takes.

This upsets the basic economic balance between supply and demand. We reach a point where the premium dollars collected no longer correctly support the normal expected loss for which it was written. These premium dollars get stuck in paying off receivables at levels that were not properly planned, and this reduces the availability of capital that can be used as limiting capacity. Without any change in the demand for limiting capacity in combination with a lack of supply, we arrive at today̵

7;s pricing environment and insured persons of all sizes feel the effects.

Underwriters who are unsure of the values ​​submitted will resort to four strategies that make the insurance market more difficult for policyholders:

  1. Insurers may choose to use less limiting capacity than they had in previous years.
  2. They can ask the policyholder to take more of the risk through increased deductibles and retentions.
  3. Insurers can choose to tighten the conditions under which an insurance can pay out for a loss.
  4. They have the opportunity to raise prices and charge higher premiums for the same limits, deductibles and conditions.

Although underreported values ​​are not the only driving force behind difficult conditions in the real estate market, this type of corporate abuse correlates directly with other market driving factors. Contractors report material and labor shortages, inflation is heating up and supply chain bottlenecks abound. All these factors contribute to the increased construction costs. It becomes even more difficult to replace an asset with materials of the “similar and quality” type when an asset is intentionally undervalued.

Impact on policyholders

As a policyholder, it is important to understand that insurance is an investment in the future of an organization, not a cost for items from easily exchangeable suppliers. Therefore, the brokers and insurance companies that a policyholder chooses to work with are integrated actors in the business decisions made, not an afterthought. Some policyholders may feel that they are smart and create cost savings by underreporting values; But as we have already noted, insurance companies have many ways to ensure that a risk is within their tolerance.

If an insurer feels uncomfortable with the values ​​submitted, it can already charge for a level of uncertainty. Let’s use a simple numerical example on a scale from 1-10. If a policyholder indicates an asset value of 6, but the insurer thinks it is closer to 8 and possibly as high as 9, it can accept a value of 6 but be careful and charge a premium associated with 9. In this policyholder is not smart, it behaves to its detriment. With the same example, if the policyholder were to hedge a third-party valuation that valued the property at 7 or even 8 that would remove the uncertainty gap. An increase in submitted values ​​does not always mean a premium increase. In this example, the policyholder receives a reasonable and lower premium fee and the insurer does not risk his business book.

Maximize efficiency

Achieving the best-in-class balance sheet protection through insurance begins with a best-in-class market submission process. When a policyholder submits accurate, defensible, data-driven value statements and detailed methodology by which the values ​​were achieved, it removes the layers of uncertainty that can be baked into the premium it pays.

True and correct property valuations initiate a relationship with potential insurance partners in good faith. Maintaining a high standard of data quality will also ensure that your submission is attractive to insurers. Underwriters get a lot more grants in a difficult market, and they will choose the opportunities that they feel most confident they can win. The probability of success increases when they have the right information to decide.

Hiring a third-party valuer is the starting point for this process and policyholders who have already hired a third-party valuer have a step up. With a true and correct starting point, it becomes easier to trend values ​​based on industry-accepted cost indices. For policyholders who do not have a third-party valuation as a jumping-off point, the cost index is not sufficient. Trending incorrect original values ​​will undoubtedly be an incorrect result.

Cutting corners never goes out. Take the time to compile true and accurate property valuations. When we all play by the honor system, we put our best foot forward to maintain a healthy insurance ecosystem.

Alexandra Glickman is senior managing director-practice leader for Arthur J. Gallagher & Co.’s global real estate and hotel business. She can be reached at Alexandra_Glickman@ajg.com. Robby Kunz is the CEO of Gallagher’s global real estate and hotel business. He can be reached at Robby_Kunz@ajg.com.


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