Now is the time to update your insured property values

Rising inflation, labor shortages, and supply chain issues can wreak havoc with replacement costs and insurance valuations.

Risk managers planning their next property insurance renewals should start the process this year with a thorough assessment of their insured values — not only of their real estate portfolios but also with respect to their equipment and inventory of finished goods, raw materials, and components.

While inflation is driving up costs across the board, supply chain issues are contributing to higher costs along with delays in shipping needed parts, raw materials and building supplies. Besides understanding the impact of these factors on real property values and replacement costs, risk managers need a sound estimate of their potential time element risks to make sure they have adequate business interruption and contingent business interruption (BI) insurance coverage.

At the same time, property insurers are acutely concerned about their heightened aggregated exposures given the spate of natural catastrophes that already have occurred this year with, among other things, flooding, the extremely active convection storm season, wildfires in multiple states, and the arrival of the peak months of the 2022 Atlantic Hurricane season.

Given the convergences of these issues, risk managers should revisit their valuations. They should also keep in mind the potential risks of inaccurate values — such as when assets are undervalued or overvalued for insurance purposes.

Here are six reasons for risk, finance, and operations executives to consider reviewing their insurance valuations before their next renewal:

Rising inflation: Despite recent actions by the Federal Reserve Bank to raise interest rates, it may take a while to tame inflation given a variety of circumstances, including, among others, the conflict in Ukraine and rising costs for energy, labor, automobiles, housing and services. Although actual impacts on property values vary in different areas of the country, the high year-over-year inflation rate alone is ample reason to revisit valuations.
Increasing replacement costs: Besides the effects of inflation, costs of many building materials have seen double-digit increases in the past year with supplies insufficient to meet elevated demand. Multiple disasters in the U.S. this year due to tornadoes, floods and wildfires are spiking the demand for building materials.
Lingering effects of COVID-19: In recent months, manufacturing in some parts of the world, especially China, has been slowed by regional shutdowns to limit outbreaks arising from new and highly communicable variants of the virus, widening the gap between latent demand and inadequate supply.
Acute supply chain issue: In addition to widespread manufacturing shortfalls arising from COVID-19 labor issues, international political disputes and other challenges, there have been enduring transportation problems. Although actions at major U.S. ports have helped address some backlogs, trucking labor shortages and higher fuel costs raise new concerns. In this context, new valuations are imperative, especially with respect to the adequacy of business interruption and contingent BI coverage limits.
Adjustments to inventory systems and onshoring strategies: In efforts to mitigate supply chain risks, some businesses have shifted from just-in-time to excess inventory systems, which increases the value of inventory at risk and may strain fire protection systems. At the same time, some companies are consolidating suppliers or shifting more manufacturing to North America, increasing inventory values at these facilities.
New NFIP valuation requirements. Among other recent changes for policyholders, FEMA’s National Flood Insurance Program now requires building replacement cost values (which must be validated every three years) for new policies as well as for all renewals. Notably, this new requirement applies to nonresidential properties as well as condominiums, larger multi-family buildings, and certain mobile facilities. Replacement cost valuations for a building, including the cost of the foundation, must be based on appraisals commonly used in the insurance industry.

Interestingly, in some cases, new appraisals might reveal that stated insured property values are higher than they should be, which may mean a reduction in insurance requirements and related premium costs.

Thanks to steady advances in technology, risk managers now have access to a wider range of cost-effective appraisal and valuation options that may be ideally suited to their immediate needs and resources, industry, and the location of their operations.

Besides on-site surveys and appraisals, which provide a great level of detail for office buildings, resorts, high-end hotels, luxury malls, and manufacturing facilities, risk managers with businesses in other sectors might have faster and lower cost options, such as limited appraisals conducted on a portfolio basis or desktop solutions.

The portfolio solutions leverage specialized technology platforms that can be used to check accuracy of valuations across a portfolio of buildings. Required input typically includes address and zip code, square footage, total stories, construction type and occupancy.

For greater detail typically required for industrial buildings, shopping malls and low- to mid-rise hotels, desktop solutions might be suitable.

To analyze business interruption values with greater precision, a growing number of risk managers are turning to solutions that quantify their supply chain exposures. These approaches help pinpoint vulnerabilities that help determine efficient and accurate ways to allocate resources to help mitigate potential outages based on cost and business impact.

In addition to facilitating more educated insurance purchasing decisions, accurate property, business interruption and contingent BI valuations help generate more reliable catastrophe modeling outputs, probable maximum loss estimates and loss expectancies.

Given the challenging economic environment, increasing threats posed by natural disasters, and uncertainty surrounding the availability, obtaining up-to-date and accurate property and business interruption valuations is critical for risk managers to feel comfortable that their enterprises remain adequately protected.

Taken from https://www.propertycasualty360.com/2022/08/24/now-is-the-time-to-update-your-insureds-property-values/

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Commercial P&C Insurance

Commercial Office Space Set for a Strong Comeback

The sustained increase in demand for office space across the nation since late 2022 suggests that the market has moved past its lowest point, according to insights from the real estate technology platform, VTS. Demand for office space began to rise in late 2022 and continued into early 2023. Since then, the office market has experienced a period of stability and growth, supported by favorable economic factors, indicating a market rebound. This conclusion is drawn from the VTS Office Demand Index (VODI), which tracks unique new tenant tour requests for office properties in key U.S. markets. The VODI serves as an early indicator of future office leasing activity. According to the index, demand for office space has grown consistently over the past 12 months, closing the second quarter with a 17% year-over-year increase and a 34% rise from the VODI’s lowest point in December 2022. A significant shift in office-based employment patterns further supports the belief that demand for office space has stabilized. After reaching its peak in August 2022, office-based employment declined by 3.9% in early 2024. However, this trend has since stabilized, and employment growth has remained steady. Additionally, a recent decrease in work-from-home rates has fueled the renewed demand for office space. “They say you can only recognize a market bottom after it has passed, and the office space market is no exception. Following what we now see as the bottom, the national demand has gradually increased, though it remains susceptible to economic challenges,” said Nick Romito, CEO of VTS. “However, the growth observed in VODI over the past 18 months, coupled with positive trends in the office-using workforce, suggests that the market has reset, and the worst is behind us.” It’s important to note that this national trend does not impact all local markets equally. Cities like Los Angeles and New York City have seen healthy growth in office space demand, while markets such as San Francisco and Washington, D.C., have experienced prolonged stagnation. In Los Angeles, office space demand surged in the second quarter, briefly surpassing pre-COVID levels, driven by an increase in the average size of office spaces sought by tenants. New York City followed a similar overall pattern, though with some softness in the second quarter. Conversely, San Francisco’s demand for office space remains unpredictable, largely due to its tech-focused workforce, which continues to favor remote work more than other industries. “Markets heavily dependent on the tech sector, like San Francisco and Seattle, are on a markedly different post-COVID recovery path compared to more diversified markets like Los Angeles and New York City. It may take some time before we see office demand in San Francisco and Seattle return to pre-COVID levels,” added Ryan Masiello, Chief Strategy Officer at VTS.

Cyber Liability

Global IT Outage Puts Business Interruption Insurance in the Spotlight

In July, a global IT outage had a significant impact on business interruption insurance policies, overshadowing the effects on cyber insurance coverages. “This incident wasn’t a result of a malicious attack, which is why typical cyber insurance policies may not have been activated,” explained Peter McMurtrie, a partner in West Monroe’s insurance sector, in an interview with PropertyCasualty360.com. “Where coverage was applicable, factors like deductible amounts, waiting periods, and coverage limits played a critical role in determining the extent of exposure,” McMurtrie noted. “Standard policies for small businesses were less likely to offer coverage, while more complex policies for mid-sized companies and Fortune 500 corporations may have included broader triggers for non-malicious outages caused by third-party software issues.” The outage was triggered by a software update on July 19, 2024, by cybersecurity firm CrowdStrike, which affected organizations worldwide using Microsoft Windows. This interruption had far-reaching consequences, including disrupting hospital systems, media outlets, financial institutions, delaying thousands of flights, and halting daily business operations. McMurtrie emphasized that while the initial impact of the outage was similar for both large and small businesses, the ability to recover operations and whether insurance covered the loss of business income varied. “Larger companies are more likely to have advanced disaster recovery plans that ensure service redundancy following unexpected outages,” he added. “Their insurance programs also tend to cover a wider range of incidents.” According to Microsoft, the CrowdStrike update error affected over 8.5 million Windows devices globally. The incident highlighted the interconnected nature of our global ecosystem, including cloud providers, software platforms, security services, and their clients. “It’s a stark reminder of the importance of prioritizing safe deployment and disaster recovery across the tech industry,” the company said in a blog post. McMurtrie pointed out that the outage’s widespread impact was largely due to its effect on organizations that are critical to societal infrastructure—sectors like agriculture, airlines, banking, energy, government, healthcare, manufacturing, and retail. “Insurance companies base their risk appetite on their ability to understand and price risks appropriately. This becomes increasingly challenging with emerging threats,” he said. “However, I anticipate that insurers will respond by clarifying policy language, refining risk selection criteria, and possibly developing new products specifically designed for this evolving exposure.”

Now is the time to update your insured property values