Four Ways Accurate Values Improve the Dialogue Between Policyholders and Insurers
Every risk manager strives to protect their company, property, business and reputation from events that are foreseeable, whether from fire, extreme weather or any of the other risks facing the company.
But some may unwittingly and needlessly expose their company and its future to inadequate protection, thereby, sacrificing business resilience.
For the last several years, insured losses industry-wide show an alarming trend: A wide variance between reported insurance values (the value of property and the income derived from operations) and the values measured at the time of loss.
There are many reasons for this discrepancy, but regardless of why, the effect is twofold:
- First, it undermines the policyholder’s risk management efforts; and
- Second, the insurance industry absorbs more loss than anticipated, while not receiving appropriate premium for the actual risk accepted.
This unfortunate trend at least partly explains the current hard market, but it is also prompting some difficult-but-necessary conversations between carriers, policyholders and their brokers.
As property insurers approach renewals, those conversations are being elevated.
Dissecting the Roots of Underreported Values
When an insurance program is based on underreported values, the understanding of the risk exposed, retained and transferred by both the policyholder and the insurance company is flawed.
Consequently, policyholder risk management decisions and capital expenditures are less effective.
For underwriters, it can lead to faulty decisions that unduly expose the carrier’s balance sheet.
At FM Global, we have found that one in four large losses exhibit issues with the reported values. This finding was validated by the appraisal of 200 locations between 2018-2019 that identified billions of U.S. dollars in underreported property value.
If you extrapolate these findings worldwide, you begin to get a sense of how big the problem is and why this is as much a financial concern for policyholders as it is for the insurance industry.
There are four reasons accurate insurance values are needed:
1) Understanding the Risk
Reported values help policyholders and carriers determine which facilities are most important to ongoing business operations.
This is central to the ability to properly identify and manage the greatest risks to the business.
2) Risk Quantification
The quantum of individual exposures is only as good as the analysis of the values. Subsequent efforts to prevent or mitigate the risk are undermined if the values are not accurate.
3) Risk Management
Risk quantification is essential to decisions about where to prioritize capital expenditures to reduce risk and to determine the right level of coverage needed to transfer the remaining risk.
4) Representation of Risk
Underwriters rely on the policyholder’s report of values to deploy capacity. Correct values are critical to an insurer’s ability to operate within its risk appetite.
The same value information is used to place reinsurance treaties.
The pattern of higher-than-expected losses predictably leads to higher rates.
How can the trend be reversed? From an underwriter’s perspective, there is a lot the industry can be doing to help policyholders understand their risk.
At FM Global, for instance, we have prioritized the hiring of property damage valuation experts to work with our clients to close identified gaps in property values.
We have also substantially increased our commitment to pay for third party field appraisals conducted on behalf of our clients. Through our business risk consulting group, we aim to help our clients better understand where their business income is exposed.
Every commercial property carrier can help its clients and ultimately all of us, policyholders and underwriters alike, to have higher confidence in insurance values.
No chief financial officer wants a notation to their financial statements because of inadequate insurance coverage. No underwriter wants to record the overline that results from underreported values.
The solution for policyholders and underwriters is simple: We need to work together to ensure we both understand the risk. &