My blogging is curtailed this week since I will be at the annual AAIMCo conference. AAIMCo is the American Association of Insurance Management Consultants, an association of insurance and risk management consultants, expert witnesses, attorneys, and educators. I’ve been a member since 2016 when I retired from the Big “I”.
This year, I’m on a panel whose subject is “Issue in Property Valuations and Why They Matter When There’s a Claim.” For the most part, we’re discussing why so many real properties, both personal and commercial lines, are undervalued. Our goal is to put our collective minds to work identifying the problems and proposing solutions.
Sometime in the weeks or months following our conference, we will likely publish a white paper on the subject. If so, I’ll post it here and, even if we don’t, I’ll write an article about our session. In the meantime, I thought you might appreciate the lighter side of this issue….
When I was with the Tennessee affiliate of the Big “I”, I once got the following inquiry from a member agent:
“How do you calculate the replacement cost for an earth home?”
This was my initial response that I sent to the agent:
Rhonda, that’s an excellent question. I don’t think that standard valuation methods would work, not that they’re all that accurate anyway. The already laughable room count method wouldn’t work for sure since every room in an earth home would count as a “den.”
While studies show that most homes are undervalued, my guess is that an earth home could be replaced dirt cheap.
And, the really nice thing about an earth home is that you don’t have to worry about termite damage which is excluded by HO policies. But damage by gophers, prairie dogs, and tunneling prison escapees are a real threat and they aren’t covered wither since they’re all rodents and excluded.
In conclusion, I recommend that you consult with someone who has expertise in building these types of structures, either a specialty building contractor…or an undertaker.
Of course, I followed this email with a legitimate one, but in this industry, you have to have some fun when the opportunity presents itself.
Back to the undervaluation issue…if you have any opinions or experiences in this area, please feel free to share them in the Comments section below. I would be very interested in your anecdotal stories, even if you have examples of overvaluation of buildings.
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I’m not sure how you can have a discussion of “undervaluation” without some understanding of what you mean by “undervaluation”. Does that mean homeowners finding out they don’t have a sufficient amount of insurance to repair or rebuild their damaged home following a loss? Or does it mean insurers are not requiring homeowners to maintain limits consistent with what insurers may be called upon to pay following a loss?
In my experience, insurers are requiring their policyholders to maintain limits in excess of those required by their policy terms. To qualify for full replacement cost coverage, homeowners are only required to maintain limits consistent with the “replacement cost” of their home, the normal everyday pre-loss cost to build a similar structure. Most insurers, however. are requiring homeowners to maintain limits equal to the “reconstruction cost” of their home, a post-loss estimate of what it might cost to repair or rebuild a home after it has been damaged in some catastrophic event. Reconstruction cost estimates include a number of potential additional costs not included in replacement cost valuations. These valuations often include building code upgrades (costs which are not even covered by standard home insurance forms), debris removal costs (most policies provide a “free” additional debris removal limit) and the cost of the foundation (most policies say not to include the cost of the foundation in the replacement cost calculation).
So, I question if the discussion of “undervaluation” should also include a discussion of “over-valuation” being used by insurers to determine required amounts of insurance. Homeowners are unable to purchase this required coverage unless they agree to maintain these inflated limits.
The discussion should also include reasons why insurers appear to discourage or refuse to offer homeowners the guaranteed replacement cost endorsement. In return for maintaining full “replacement cost” limits, the homeowner gets an “unlimited” amount of insurance should the home be damaged or destroyed. Instead, they offer only fixed limit policies based on inflated limits and require homeowners to retain the upside risk should some multi-location catastrophic event occur.
How can “undervaluation” be an industry issue if the industry is already requiring “over-valued” limits?
I do see valuation/underinsurance as a big issues. I was presenting a digital SOV solution to a customer and one of their first thoughts was am I somehow trying to increase their property valuations through this process. No, I’m only trying to take a manual process, the SOV spreadsheet and automate and enrich it with secondary data. This was a large F500 firm. This is top of mind for the underwriting community.
Bill, we struggle to effectively set limits for Coverage A, B, and C of Ordinance and Law Coverage.
That’s one of the issues we’ll be investigating. At this point, I think the only viable solution is to include this cost as part of replacement cost like any other increase in labor or materials rather than exclude or limit it and make additional coverage an option. Of course, the problem is, how much do you add to the replacement cost calculation to get there.
Bill, although I recently retired, I constantly ran across valuation problems in 47 years of agency work.
Many companies and agents mail solicitation quotes based on vale’s off of the tax rolls, thus perpetuating the myth that tax value is ok for replacement costs.
If course, many agents have very little real knowledge of construction costs and companies do not waste their time teaching it.
Consider a modest home purchased and re-modeled, updated, etc. the valuation is usually based on the original construction.
I have also seen large properties where a carrier would insist on a higher value especially when there were multiple structures on the schedule. They impress the owner with their assessment, they get more premium for their actual exposure and of course, they get a higher deductible for the risk.
I have seen carriers turn down their online calculators to be more competitive in a preferred market. The same RC calculation source came up with different numbers, coincidentally exactly 10% less.
I used my personal construction knowledge, company inspections or a valued contractor to do a more accurate evaluation of current costs.
A good agent knows how to sell the right answers and be a trusted advisor.
All good points
You are all intelligent guys but why can’t we define what “replacement cost” means? Is it the current cost to build a similar structure prior to any damage? Or is it the potential cost to repair or replace the structure “after” it has sustained significant damage? Or does it mean what it might cost to repair or rebuild the structure after a wildfire type event? Seems like those are three different values and we.are referring to them as though they are all the same.
Same with “undervalued, what does that term mean?
I believe undervalued is more of a problem than we realize. It seems that most consumers have a hard time understanding the difference between market value, tax assessment value, and construction replacement cost.
Can we define what you mean by “construction replacement cost”? Does it mean the current cost to construct a similar structure prior to any damage? Or do you mean the cost to repair or rebuild it after it has sustained considerable damage? Or do you mean what it might cost to rebuild after some catastrophe like a hurricane or wildfire? Seems to me those are significantly different values. Which one should consumers use to determine the “proper” amount of insurance?
I’ve found undervalution to be an issue.
On the other hand, as someone alluded to here – often it is the insurer who will run their own valuation reports and require limits on the higher end.
When dealing with percent deductibles – wind, hurricane etc, excessive limits are to the insureds disadvantage as any increase in limits will correspondingly increase the deductible.
My current personal lines insurer insisted on increasing my dwelling coverage. I went along with it because I have home, auto, boat, and umbrella coverage with them because of the quality of their products and the premium impact was pretty small. I think my prior limit was fine, but a little buffer probably won’t hurt.
The percentage deductible issue is certainly relevant if the deductible is based on the limit and not the loss amount.