Inflation has caused insurance coverage gaps and disaster resilience problems for many companies, according to a new report by TÜV SÜD Global Risk Consultants, as losses from hurricanes, wildfires and other catastrophes result in claims that don’t cover rebuilding or replacement costs.
Many companies are inadvertently underreporting the valuations of properties and equipment to insurance carriers, the report found, stating that the mismatches between reported and actual values are resulting in coverage gaps that leave companies unable to “collect enough to restart the flow business after a claim.”
The report cited rising construction costs as a major culprit, with everything from paint (+26%) to wallboard (+18%) to roofing contractors (+21%) becoming increasingly expensive amid an inflationary economy.
“Companies must defend their values because underwriters are now requiring more data on how they determined asset valuations,” said David Rix, global sales manager at TÜV SÜD Global Risk Consultants. “A lot of companies are not prepared for that, meaning claims won’t pay for rebuilding or replacement costs.”
“Property valuation is a key foundation of property underwriting and impacts several aspects of the insurance risk transfer process,” said Peter Linn, the company’s vice president of risk engineering services. “This includes projected claims values, replacement costs, adequacy of coverage, and inflation considerations impacting future physical asset and BI values. Properties values that were appraised years ago may no longer be valid which can leave companies under- or over-insured, both having cost and claim recovery ramifications.”
The report, titled How Inflation Led to Property Insurance Coverage Gaps, also includes year-over-year inflation data on construction and labour costs, in addition to discussing why rising construction prices lead to inaccurate insurance claims and coverage gaps.
It also advised risk managers to partner with a seasoned valuation specialist to establish property and equipment valuations that are credible for underwriting.
“If it’s been three years or more since you’ve assessed valuations, it’s time to get going,” said Justin Chen, global manager for property valuation services at TÜV SÜD Global Risk Consultants. “Start early. For companies with large real estate portfolios, updating the SOV can be a multi-year process.”
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