The insurance industry is hyper fixated on an issue that is extremely relevant to the property sector, namely valuation.
That is according to Ben Beazley (pictured), executive vice president, national accounts property at Jencap Group, winner of The Best Insurance Companies to Work for in the USA.
“Valuation is the hottest topic in insurance right now,” Beazley said. “For nearly 20 years, the cost to rebuild a structure due to a loss was much, much lower — the market was so soft. Now, since COVID, rates have risen dramatically and really thrown insurers off.”
In a conversation with Insurance Business, Beazley spoke about how valuation has been miscalculated within the industry and the ways to get more accurate numbers.
With soft market conditions persisting over multiple years, especially in the property sector, some underwriters had tackled valuation issues behind the scenes, but, as Beazley pointed out, “they did the rating of the account and would be using higher values, but that would become a piece of paper in a client’s file, not indicative of a wider trend.”
Now that this issue has become front and center, discovering and mending miscalculation errors is more important than ever.
One of the most integral components of faulty estimation is directly related to the resources needed to rebuild a structure.
“Material and labor costs are often miscalculated,” Beazley said.
Appraisal guides for developing replacement costs, depreciated values, and insurable values of buildings and other improvements, can be used to guide an evaluation of potential costs, though they may not be entirely accurate, according to Beazley.
In Beazley’s view, public adjusters have contributed to this widespread issue of miscalculation.
“They're the ones that have really exploited the valuation issue because they're escalating those claim amounts for public buildings due to labor and cost increases,” he said.
In situations where valuation is not properly calculated at the time of writing a policy, the insured can be put in a precarious position.
“Most of the markets are tying the limited liability back to the valuation that the insurer provides at the time the account is quoted is quoted,” Beazley said.
“Say you quoted an apartment complex at $120 per square foot and a fire happens, the reality is that it may actually cost $170 to $200 a square foot, which can impact an insured very badly when filing a claim and trying to restore the damages to that building.”
As prices rise due to inflation, labor shortages and other economic problems, getting the best and most up-to-date data is crucial.
One of the best ways to understand valuation in any given market is having an open dialogue with contractors in the area who are well versed on trends on rates associated with materials and labor.
Elsewhere, when writing a policy for a building, it is also important to understand cat modeling and how it is related to valuation, especially as climate change and erratic weather events are causing more destruction to property.
“Cat modeling itself can't rectify valuation, but instead, is very beholden to it,” Beazley said.
This can be problematic because carriers will not quote clients under a certain amount, and in places like California where pricing has gone up exponentially, this means that premiums and deductibles will also increase as a result.
To justify these prices, or potentially find a cheaper solution, brokers need to be able to ask the right questions and find quality data to submit to underwriters for the fairest policy possible.
In terms of exposure and vulnerability to natural catastrophes, the industry should look to cat modeling, according to Beazley.
“An agent is going to be referring to a wholesale broker 90% of the time for cases like this, and it is incumbent on them to go to the wholesaler to find out what the key secondary factors are, whether it’s convective wind, named storm, earthquake, wildfire or flood,” Beazley said.
This will allow the most detailed information to be submitted for the underwriters to analyze and valuate accordingly.
