How to ensure your clients’ property values are accurate amid volatility
Inaccurate real estate values were an industry-wide challenge in construction even before the pandemic brought economic volatility. So how can you accurately quantify an insured’s risk when pricing is so volatile?
Customers run the risk of being underinsured when reported values and losses are misaligned, speakers said in a panel discussion at the recent RIMS Canada Conference in Halifax. But insurers can ensure their customers’ values are accurate by reporting values year after year – or even more frequently.
Construction cost increases due to factors such as increased raw material prices, supply chain bottlenecks and increased demand for construction materials are impacting the values, the panelists said.
“I see some people [say]”Now what we’re seeing is that the reported values don’t always match the losses,” said Luc Bissonnette, vice president and branch manager, Eastern Canada at FM Global Bissonnette.
“Let’s say we take water damage that happened two years ago [to a building]. [If] The same water damage loss is happening today, it’s not 14% or 20% [increase]. We are now talking about 30, 50, 70% or more.”
The solution? Insurers should check the reported values even more frequently than before.
“We try to look [values] Year after year, but I’ve recently heard that some clients are now reporting their values every six months to make sure they aren’t underinsured,” Bissonnette said. But that depends on your policy, he says.
Coinsurance policies – which require the owner of a damaged property to take out another policy covering much of the property’s present value at the time of the damage in order to collect the full insured amount – can be particularly inaccurate if customers don’t check their number regularly.
“The reason coinsurance exists is to give you that threshold for change,” said Devin Baker, manager of business development at Suncorp Valuations. “The threshold for change has shifted dramatically in the last year, where you can do everything right, [but] If you were insured exactly a year ago, you’re probably getting a 14% discount now. And if you have 100 percent co-insurance, you’re just outside that line.”
Ultimately, “you need to look at your numbers and make sure you have adequate insurance,” Baker said. “Probably we’ll come back to this and become an annual exercise, but right now we’re on the precipice where it will take time for prices to come back down. You will probably never come down again [to] before COVID [levels].”
Timber prices, for example, have been volatile throughout the COVID-19 pandemic.
“Before COVID, lumber prices were around $350 per 1,000 boards [feet]. At the peak we reached north of $1,400. We’re back down to around $570 [as of mid-September]. So we’re still almost 50% above pre-COVID levels,” Baker said.
While current rising timber costs and other supply chain issues can suddenly affect values, inaccurate values were a challenge even before the pandemic.
Bissonnette said FM Global found nearly a quarter of its losses at odds with reported values five to six years ago. “That was before the pandemic. [But] The volatility these days only makes the problem bigger.”
Featured image from iStock.com/erhui1979