Underreporting of property values is a chronic problem for the commercial insurance industry. Underwriters cannot accurately evaluate the size and scope of a risk or price it appropriately if risk managers submit incorrect estimates of their property’s worth.

When valuations are low, the premium charged will be lower, too. That may be great news for the risk manager initially — until a total loss occurs. When coverage doesn’t sync up with risk, policyholders can be left exposed or insurers end up paying more than they planned to. Either way, the client-carrier relationship can go sour.

“We take the valuations submitted by our insureds very seriously. We use those numbers to model risk, project loss estimates, set a line for limits and determine pricing. They are the basis of the property insurance contract, and we expect them to be accurate,” said Michele Sansone, President of North America Property, AXA XL.

“If the value is wrong, we won’t find out until a claim happens, and that’s where we run into big problems.”

Businesses fail to submit accurate valuations for several reasons. Here are the top three reasons why valuations go wrong, and why it is so important to get them right:

1) Risk managers aren’t using the right valuation tools.

Michele Sansone, President of North America Property, AXA XL

Property valuations account for the physical structure, contents and equipment, and business interruption impact. For each component, values are best determined by third parties with specialized expertise, ensuring both accuracy and objectivity.

A reputable appraisal firm with experience in the insured’s industry, for example, provides underwriters a greater degree of confidence that the numbers are correct and comprehensive.

But even if third party appraisal is not a realistic option, risk managers can rely on widely available tools like the Marshall & Swift Valuation cost manual to develop replacement costs and depreciated values of commercial structures.

When it comes to business interruption costs, “ideally you would conduct a thorough business impact analysis,” Sansone said. “How long might it take for you get back up and running? Do you have backup facilities and equipment? What about backup data storage? If an insured can explain all those components and justify to the underwriter in detail how they arrived at their business interruption value, we’re in a good spot.”

At minimum, risk managers should use a business interruption and extra expense worksheet as their guide to ensure every potential financial impact is measured.

Depending on the size of the organization, it may be necessary to bring in a forensic accountant to ensure no stone goes unturned.

2) Leadership undervalues transparency in insurer relationships.

Once they identify the appropriate tools and resources for their organization, risk managers might still hit roadblocks getting support from leadership to put those tools to work. Especially for large entities with multiple locations across several geographic regions, accurate property valuations take time and money to execute.

While the primary purpose of property valuations is to supply underwriters with data, they also demonstrate a spirit of collaboration when done accurately and transparently. They are the bedrock of a trusting relationship that yields long-term benefits for insurers and insureds alike.

Getting them done correctly requires a strategic vision that fully integrates risk management and recognizes the value of those insurer relationships.

“As an underwriter, you trust what your client is telling you. You stick your neck out to write a piece of business and you stand by it. But when a $50 million loss happens on a blanket policy where the property was valued at $20 million … that violates the underwriter’s trust,” Sansone said.

“This could have downstream effects for the insured because once it is known that the property values were underestimated, their reputation in the market suffers and will inhibit their ability to get favorable terms and pricing going forward.”

3) Aggregate limits provide a false sense of security in underreported values.

Blanket property policies may also have lulled business leaders into a false sense of security. When a single large limit applies to an entire portfolio of properties, risk managers may not worry about undervaluing individual locations since it’s unlikely that the entire aggregate will be needed for a single loss.

“Blanket policies afford very liberal coverage. As long as aggregate limits are sufficient to cover a significant loss, even when that loss does not align with stated values, it’s easy for risk managers to become lax in thoroughly updating the valuations,” Sansone said.

In this case, the market is tackling the problem itself. Property carriers are asking for signed statement of values and scheduling the locations and values on to the policy to help alleviate this valuation issue. They are also tightening up their terms and conditions by imposing occurrence limits of liability in place of blanket coverage.

“An occurrence limit of liability endorsement means that a policy will be limited by the values submitted to the carrier so it does away with the blanket limit concept, covering all of an insured’s scheduled properties,” Sansone said.

“When there’s any doubt that the values are inaccurate, underwriters are encouraged to use these tools.”

Why Solid Property Protection Matters More than Ever

Beyond reliable coverage, a primary benefit of maintaining strong relationships with insurers is access to valuation services that produce accurate estimates while reducing the burden on insureds.

Carriers want their clients to be as well-protected as possible and are willing to take extra steps to facilitate accurate risk assessment.

“We have plenty of capabilities to help insureds understand their values, including a global staff of property risk engineers equipped to help with appraisals and up-to-date data on equipment replacement costs,” Sansone said.

“There are several ways AXA XL can help insureds finalize accurate statements of value.”

Today, an accurate understanding of property values is especially important given the heightened risk environment.

Rising frequency and severity of natural disasters increases the risk that multiple properties in a company’s portfolio will sustain heavy damage or feel the effects of supply chain disruption. The far-reaching impacts of the COVID-19 pandemic present additional challenges. On top of those threats, companies are facing hard market conditions that would make renewals difficult even without increasing loss potential.

“It is perhaps more important than ever to understand what is at risk and work with carrier partners to ensure adequate protection is in place,” Sansone said.

To learn more, visit https://axaxl.com/insurance/product-families/property.

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