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Don’t Let These Common Property Valuation Mistakes Ruin Your Insurable Values

Know the risks of inaccurate insurable property values.
By: | March 28, 2017 • 5 min read

Do you know the insurable value of your property?

Most risk managers would instinctively say “yes, of course!” Correctly valued property, after all, underpins a successful insurance program and ensures that all buildings, equipment and inventory that need to be replaced after a loss will indeed be covered.

“When people talk about values, they tend to forget the multiple impacts to a business. Things like loss estimates on the account, reinsurance issues, etc. all stem from identifying accurate insurable value”, says Rick Lunt, Global Manager – Valuation Services of Global Risk Consultants.

Accurate insurable values matter to carriers, too. Insurers and re-insurers increasingly depend on catastrophe models to assess the accumulation risk in their portfolios, but those models are ineffective if the wrong values are fed into them. If a carrier can rely on their insured’s values, it helps both parties build a more trusting relationship.

Establishing accurate insurable values, however, is not as straightforward as it may seem.

“Insurable values don’t just appear in a financial statement,” Lunt said. “You have to work to develop credible insurable values and keep them updated.”

Here are some mistakes commonly made when determining insurable values:

  1. Relying on Depreciated Value

Often times, the depreciated value of buildings, equipment and other property is pulled from financial statements, but that number is not a true reflection of replacement cost.

“Depreciated value is often brought into the insurance discussion when really it is not relevant to developing insurable replacement costs. What you really need to know is replacement cost, as defined by your insurance policy,” Lunt said.

To get at building replacement costs, companies may consult a professional contractor or in-house construction staff, utilize a building estimating tool, or rely on a replacement cost appraisal. For personal property, true replacement costs can be established with assistance from in-house engineering and purchasing staffs, discussions with equipment manufacturers and suppliers, or with a replacement cost appraisal.

  1. Not Utilizing Proper Cost Indices

Rick Lunt, Global Manager – Valuation Services

Unfortunately, determining correct values in the first place is only half the battle. The other half is keeping the values current and aligned with inflationary cost indices and market trends. Many times, decision makers fail to factor in these trends and let their insurable values gradually fall out of date.

“If the goal is to identify the current replacement cost of a piece of equipment that is five years old, there is a need to recognize the value of the original acquisition cost and apply inflationary cost trends to determine an approximate, current replacement value,” Lunt said.

If inflation runs at 2-3% per year, reported insurable values can be off 15% or more five years down the road should proper cost indexes not be applied.

Like inflation, the ups and downs of the construction market may have a significant impact on insurable replacement costs. Even if new construction is flat nationally, an insured’s specific location may be in a pocket experiencing a building boom, which may boost construction costs. “It’s important to be aware of how the construction market is performing on a local level, rather than just relying on available information regarding national trends,” Lunt said.

  1. Outdated Asset Records

The use of capital asset records is often a good starting point to begin developing insurable values. Based on the original acquisition cost of machinery and equipment, the application of proper cost trends can provide a reasonable estimate of current insurable replacement values. This approach, while a good one, is reliant upon the accuracy of the asset records themselves, which is based on how often records are updated in regards to the addition of new equipment, the retirement of old equipment, and the policy for expensing small items that are no longer on the books.

For example, tooling may be expensed on the books, yet still be functional and in production.

“In manufacturing plants, for example, things like tooling for equipment, dies and fixtures get written off quickly, but they are necessary for the operation of that equipment and need to be accounted for,” Lunt said.

From raw materials through to finished products, inventory can be a large component of insurable value. Decision makers should be aware of how finished goods are valued – either at selling price or cost. Most importantly, decision makers must be aware of how this value is established, and care should be taken to ensure that the reported value approach matches the provided coverage.

Turn to a Trusted Consultant

An experienced and trustworthy valuation service provider can help get the numbers right. Many third-party providers, however, work on a project-by-project basis. The relationship doesn’t extend past the actual valuation. That can be problematic if risk managers have follow-up questions or need recommendations on how to keep their values updated.

Global Risk Consultants (GRC) has long provided fire protection engineering, boiler and machinery, and other loss control services to clients. With a customer focus at the forefront, GRC expanded its service portfolio to include property valuation in January 2017, providing the service after identifying the opportunity to provide clients yet another unbundled loss control solution.

Lunt, who has years of experience as a professional appraiser, brings a unique perspective to integrating this service into an unbundled risk management program. With his valuable knowledge and experience on the carrier side, Lunt now heads up this GRC team worldwide.

“Unlike some other providers in this space, we take a consultative approach,” Lunt said. “We want to build lasting relationships with our clients, provide them with advice and guidance, answer questions, and act as their partner.”

The new valuation team will work with clients’ needs and within their budgets, providing everything from simple analyses in the form of desktop estimates, all the way through to on-site inspections.

“An on-site visit may not always be necessary if we can get enough information from past appraisals, asset records, building construction cost data, etc. But seeing property in person is always the best way to determine its value,” Lunt said.

“At Global Risk Consultants, it’s all about bringing technical expertise to the client. We’re focused on bringing the best information possible to the customer to build long-term partnerships.”

To learn more about Global Risk Consultants’ property valuation services, visit https://www.globalriskconsultants.com/.

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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Global Risk Consultants. The editorial staff of Risk & Insurance had no role in its preparation.




The only unbundled property loss prevention company to offer a complete portfolio of in-house, site-specific services and risk management solutions.

Risk Report: Manufacturing

More Robots Enter Into Manufacturing Industry

With more jobs utilizing technology advancements, manufacturing turns to cobots to help ease talent gaps.
By: | May 1, 2018 • 6 min read

The U.S. manufacturing industry is at a crossroads.

Faced with a shortfall of as many as two million workers between now and 2025, the sector needs to either reinvent itself by making it a more attractive career choice for college and high school graduates or face extinction. It also needs to shed its image as a dull, unfashionable place to work, where employees are stuck in dead-end repetitive jobs.

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Added to that are the multiple risks caused by the increasing use of automation, sensors and collaborative robots (cobots) in the manufacturing process, including product defects and worker injuries. That’s not to mention the increased exposure to cyber attacks as manufacturers and their facilities become more globally interconnected through the use of smart technology.

If the industry wishes to continue to move forward at its current rapid pace, then manufacturers need to work with schools, governments and the community to provide educational outreach and apprenticeship programs. They must change the perception of the industry and attract new talent. They also need to understand and to mitigate the risks presented by the increased use of technology in the manufacturing process.

“Loss of knowledge due to movement of experienced workers, negative perception of the manufacturing industry and shortages of STEM (science, technology, engineering and math) and skilled production workers are driving the talent gap,” said Ben Dollar, principal, Deloitte Consulting.

“The risks associated with this are broad and span the entire value chain — [including]  limitations to innovation, product development, meeting production goals, developing suppliers, meeting customer demand and quality.”

The Talent Gap

Manufacturing companies are rapidly expanding. With too few skilled workers coming in to fill newly created positions, the talent gap is widening. That has been exacerbated by the gradual drain of knowledge and expertise as baby boomers retire and a decline in technical education programs in public high schools.

Ben Dollar, principal, Deloitte Consulting

“Most of the millennials want to work for an Amazon, Google or Yahoo, because they seem like fun places to work and there’s a real sense of community involvement,” said Dan Holden, manager of corporate risk and insurance, Daimler Trucks North America. “In contrast, the manufacturing industry represents the ‘old school’ where your father and grandfather used to work.

“But nothing could be further from the truth: We offer almost limitless opportunities in engineering and IT, working in fields such as electric cars and autonomous driving.”

To dispel this myth, Holden said Daimler’s Educational Outreach Program assists qualified organizations that support public high school educational programs in STEM, CTE (career technical education) and skilled trades’ career development.

It also runs weeklong technology schools in its manufacturing facilities to encourage students to consider manufacturing as a vocation, he said.

“It’s all essentially a way of introducing ourselves to the younger generation and to present them with an alternative and rewarding career choice,” he said. “It also gives us the opportunity to get across the message that just because we make heavy duty equipment doesn’t mean we can’t be a fun and educational place to work.”

Rise of the Cobot

Automation undoubtedly helps manufacturers increase output and improve efficiency by streamlining production lines. But it’s fraught with its own set of risks, including technical failure, a compromised manufacturing process or worse — shutting down entire assembly lines.

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More technologically advanced machines also require more skilled workers to operate and maintain them. Their absence can in turn hinder the development of new manufacturing products and processes.

Christina Villena, vice president of risk solutions, The Hanover Insurance Group, said the main risk of using cobots is bodily injury to their human coworkers. These cobots are robots that share a physical workspace and interact with humans. To overcome the problem of potential injury, Villena said, cobots are placed in safety cages or use force-limited technology to prevent hazardous contact.

“With advancements in technology, such as the Cloud, there are going to be a host of cyber and other risks associated with them.” — David Carlson, U.S. manufacturing and automobile practice leader, Marsh

“Technology must be in place to prevent cobots from exerting excessive force against a human or exposing them to hazardous tools or chemicals,” she said. “Traditional robots operate within a safety cage to prevent dangerous contact. Failure or absence of these guards has led to injuries and even fatalities.”

The increasing use of interconnected devices and the Cloud to control and collect data from industrial control systems can also leave manufacturers exposed to hacking, said David Carlson, Marsh’s U.S. manufacturing and automobile practice leader. Given the relatively new nature of cyber as a risk, however, he said coverage is still a gray area that must be assessed further.

“With advancements in technology, such as the Cloud, there are going to be a host of cyber and other risks associated with them,” he said. “Therefore, companies need to think beyond the traditional risks, such as workers’ compensation and product liability.”

Another threat, said Bill Spiers, vice president, risk control consulting practice leader, Lockton Companies, is any malfunction of the software used to operate cobots. Then there is the machine not being able to cope with the increased workload when production is ramped up, he said.

“If your software goes wrong, it can stop the machine working or indeed the whole manufacturing process,” he said. “[Or] you might have a worker who is paid by how much they can produce in an hour who decides to turn up the dial, causing the machine to go into overdrive and malfunction.”

Potential Solutions

Spiers said risk managers need to produce a heatmap of their potential exposures in the workplace attached to the use of cobots in the manufacturing process, including safety and business interruption. This can also extend to cyber liability, he said.

“You need to understand the risk, if it’s controllable and, indeed, if it’s insurable,” he said. “By carrying out a full risk assessment, you can determine all of the relevant issues and prioritize them accordingly.”

By using collective learning to understand these issues, Joseph Mayo, president, JW Mayo Consulting, said companies can improve their safety and manufacturing processes.

“Companies need to work collaboratively as an industry to understand this new technology and the problems associated with it.” — Joseph Mayo, president, JW Mayo Consulting

“Companies need to work collaboratively as an industry to understand this new technology and the problems associated with it,” Mayo said. “They can also use detective controls to anticipate these issues and react accordingly by ensuring they have the appropriate controls and coverage in place to deal with them.”

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Manufacturing risks today extend beyond traditional coverage, like workers’ compensation, property, equipment breakdown, automobile, general liability and business interruption, to new risks, such as cyber liability.

It’s key to use a specialized broker and carrier with extensive knowledge and experience of the industry’s unique risks.

Stacie Graham, senior vice president and general manager, Liberty Mutual’s national insurance central division, said there are five key steps companies need to take to protect themselves and their employees against these risks. They include teaching them how to use the equipment properly, maintaining the same high quality of product and having a back-up location, as well as having the right contractual insurance policy language in place and plugging any potential coverage gaps.

“Risk managers need to work closely with their broker and carrier to make sure that they have the right contractual controls in place,” she said. “Secondly, they need to carry out on-site visits to make sure that they have the right safety practices and to identify the potential claims that they need to mitigate against.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]