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.