3 Reasons Why Property Valuation Is More Important Than Ever

May 2022

Commercial real-estate buildings, views from a city street.

It’s usually good news to see property values rise year over year, but the COVID-19 pandemic and its after effects are increasing rates at an alarming speed. On one hand, property owners want to see real estate values grow. But if your insurance coverage hasn’t been tracking with this growth, you could be in for an unpleasant surprise in the unfortunate event of a loss. Here are three things to keep in mind:
  1. Natural disasters are bringing more damage, more often
  2. Replacement costs have skyrocketed
  3. Property valuation ensures an appropriate level of protection

#1 – Natural disasters are bringing more damage, more often

By many accounts, 2021 was a rough year. From a meteorological point of view, it was especially intense, with 20 extreme weather events, each causing over $1 billion in damages in the United States. These billion-dollar level catastrophes included: 
  • 1 drought
  • 2 floods
  • 11 severe storms producing tornados, high-wind, and/or hail
  • 4 tropical cyclones
  • 1 wildfire
  • 1 winter storm 
This is above the average of 17.8 billion-dollar disasters seen each year from 2017-2021. In contrast, between 1980-2021, the average was 7.7 major natural disasters per year. This increase in weather-related risks shows no signs of slowing.

#2 – Replacement costs have skyrocketed

After the storm has passed, it’s getting more and more expensive to recover. Costs are rising much faster than standard inflation calculators can predict. There are several key factors driving this increase.

As of March 2022, US Inflation rates are rising at an alarming pace. The New York Times reported that “[t]he Consumer Price Index rose by 7.9 percent through February, the fastest pace of annual inflation in 40 years.” And increased inflation shows no signs of stopping. Treasury Secretary Janet L. Yellen, speaking with CNBC, stated that, “[w]e’ve seen a very meaningful increase in gas prices and my guess is that next month, we’ll see further evidence of an impact on US inflation because of Putin’s war on Ukraine.”

Cost of Goods and Materials
According to the National Association of Home Builders, construction costs in 2021 were up 23% over the previous year. The cost of lumber has come down from its May 2021 peak when it was three times more expensive than before the pandemic, but prices are still running high. As of December 1, 2021, lumber prices were 124% higher than in August. Analysts attribute this spike to wildfires and floods in British Columbia and the northwest United States that disrupted an already fragile supply chain.

Cost of Labor
COVID-19 continues to impact not just the worldwide supply chain, but labor costs will run high in 2022 with a growing lack of skilled workers. This was already a major challenge across all trades, with Gen Z putting construction near the bottom of the list of where they want to work.

#3 – Property valuation ensures an appropriate level of protection

In light of these natural and economic forces, insurers and policyholders are wanting to find ways to protect themselves from loss. One avenue is through more accurate property valuations. Property valuations are the backbone of the insurance industry. Financial Executives International writes:

“Accurate values are the raw materials of insurance, and insurance underpins a sound risk management program that keeps you resilient, mitigates disruption and ensures you recover as quickly as possible.” 

As critical as accurate property valuations are to insurers, businesses may underreport the value of these key assets. This may be completely unintentional

Rubber-stamping budgets – There’s a lot of work that goes into agreeing upon a budget. Once that insurance line-item has been approved, it’s sometimes easier to just keep approving it year after year, instead of opening the process up again.

Balance sheet budgeting – Unsure about how much the amount of property insurance you should have? Some businesses will look to their balance sheet to estimate their property value, but that figure doesn’t necessarily reflect the cost to rebuild.

Changing business models – Many businesses had to pivot during the pandemic and adjust their business model to the new normal. The value of the business operating out of that property may have changed. 

Accurate property valuation means that businesses get an appropriate level of coverage and avoid coinsurance penalties in the event of a loss. With weather-related hazards and recovery costs on the rise, it’s more important than ever for insurance agents and business owners to review property valuation for accuracy and appropriate coverage. Although the initial valuation may have been sufficient, a new replacement cost estimator should be utilized in subsequent renewals. Alternately, agents can speak with their policyholders about attaching an inflation guard endorsement. 

This information is for general purposes only and is not intended to provide individualized legal or regulatory advice.