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Should You Revisit Insured Property Value Estimates?

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One of the first steps in obtaining commercial property insurance is to determine the value of the property being insured. The reported property value will drive premium amounts and, importantly, represents the property loss exposure.

Some commonly used property valuation methods include: obtaining an appraisal from a third-party firm; utilizing fixed-asset records adjusted for cost inflation; or using a simple benchmarking factor, such as dollars per square foot. In some cases, utilizing a simplified valuation approach can provide a reasonable value estimate with minimal effort. On the other hand, performing an appraisal (which insurers typically consider the “gold standard”) can provide much-needed accuracy and thoroughness, but will require a greater commitment of time and resources. 

At times, elevating the accuracy of a property value estimate can provide significant advantages during the insurance placement process. The key for risk managers, brokers and insurers is to recognize situations in which an accurate and comprehensive property valuation is critical. Consider these eight factors in the context of the insured property to see if a deep dive into the value estimate is necessary:  

  1. Size of exposure and riskiness of operation
    When property exposures are immense or operations are inherently risky, a thorough estimation process should be conducted every three to five years. Refineries and chemical processing plants with billion-dollar exposures and high-risk operations are a prime example—the stakes are too high to rely on cursory valuation methods over the long term.
  2. Changes in costs  
    Over time, some property costs will change more than others. These fluctuations are primarily driven by changes in technology, capability, and material and labor costs. As of this writing, there have been significant increases in commodity prices such as steel and lumber, which are driving up the costs of new property and equipment. When property is subject to a rapidly changing cost environment, this complexity needs to be carefully considered within the estimation method.  
  3. Complexity and scope of property 
    Global operations and complex properties often require a thorough analysis to be performed periodically. There is simply too much detail and nuance to use an abbreviated estimating approach for an extended period without introducing the possibility of significant error. Many global firms establish a multi-year process in which a comprehensive analysis is performed on a portion of properties each year.  
  4. Type of capital expenditures 
    A company’s capital expenditures typically represent either new asset additions or improvements to existing assets. Accounting for new assets is a straightforward process of addition. However, capital expenditures that represent improvements in condition may not translate directly into increasing replacement value for insurance purposes. This is a frequent occurrence within heavy industrial and processing operations and can result in an overestimation of value if not properly analyzed.  
  5. Major changes to business or operations 
    Major changes within a business, such as reconfiguring a manufacturing facility, adding production capacity, acquiring new businesses, consolidating operations, or relocating an operation, are likely to result in changes to the property and assets. Making a diligent effort to assess these circumstances in detail will help establish an accurate property value that can be used going forward.  
  6. Insurance market conditions 
    As of this writing, the property insurance market has experienced substantial price increases for three consecutive years. When insurance prices are high, developing an accurate estimate of property value will provide assurance that the coverage is neither more nor less than necessary. Developing reliable and accurate value estimates can also be a key differentiator for insureds when engaging with insurers in a difficult market.  
  7. Recent losses reveal inaccurate value estimates 
    Insurers will seriously question the validity of reported property values if a recent property loss reveals large inaccuracies in reported value estimates. In this case, performing a comprehensive valuation of the insured property is the best course of action.  
  8. Adjusting value estimates over time 
    Many companies adjust value estimates from the prior year to account for cost inflation. The accuracy of this approach will diminish over time. For typical commercial properties, conducting a comprehensive valuation every five to eight years can help recalibrate value estimates.  

Correctly valuing insurable property is one of the most critical inputs for managing property risk. While a shorthand valuation estimate may suffice in some circumstances, it is not a perfect solution to every situation. Sometimes there is no substitute for a thorough and diligent value estimate. Striking the right balance between valuation accuracy and effort requires knowing when an estimate is good enough and when it is not.  

RIMS Virtual Advocacy Week: A Q&A with Florida Insurance Commissioner David Altmaier

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Today, RIMS is taking its annual Legislative Summit online, kicking off the first RIMS Virtual Advocacy Week. Featuring a full slate of networking, a panel on pandemic insurance, updates on the 2020 U.S. elections, and hands-on advocacy with members of Congress, RIMS Virtual Advocacy Week is still open for last-minute registrations, if you want to join in on the action.

On Wednesday, September 16, the agenda includes a fireside chat with Florida Insurance Commissioner David Altmaier, who is also president-elect of the National Association of Insurance Commissioners (NAIC). Commissioner Altmaier has held the position for four years and has been with the Florida Office of Insurance Regulation office for nearly 12.

Altmaier recently appeared on RIMScast to discuss the issues he will address in Wednesday’s session, most notably the impact COVID-19 has had on the landscape of business interruption coverage. Check out the highlights below, and download the episode for Commissioner Altmaier’s full interview and a deeper dive into other topics such as ORSA reports, the Terrorism Risk Insurance Act (TRIA) and the National Flood Insurance Program (NFIP).

What playbook did you use to prepare and react to COVID-19?

David Altmaier:  Our response initially looked a lot like what we would do for an inbound hurricane: We assembled what we call our “incident management team,” and started to look at the types of needs of consumers from an insurance standpoint. We put into place mechanisms that we thought would be helpful as the pandemic began to take hold in Florida and around the United States. And we saw insurance commissioners around the country doing the same thing, obviously, as the pandemic unfolded and we started to see other risks and concerns emerge.

COVID-19 has been at the forefront of all of our regulatory discussions going back to March of this year. and that will continue to be at the forefront of our discussions even after the pandemic has concluded.

Business interruption insurance is closely tied to it and has emerged as one of the more pressing insurance issues as a result of the pandemic. We have seen issues like telemedicine and catastrophe response in a virtual setting, for example, also come up as a result. [That has] impacted how we go to work every day and how we interact with our stakeholders, and I think those will be some worthy discussion topics as well.

How can the risk management community drive meaningful change in regulations, policies and legislation?

DA: As discussions take place about an event that we haven’t seen in a really long time, like a pandemic, there will be a lot of ideas that come up in terms of how to react to the current pandemic, as well as how to prepare for future pandemics. And I think that, as we have those conversations, there’s going to be a multitude of stakeholders whose viewpoints are important.

Risk managers are certainly going to be at the top of that list because they are going to understand the risks that the insurance industry faces. We see ideas of what level of responsibility the insurance industry [should have] in terms of covering things like business interruption insurance. Their expertise will be invaluable as we begin to work with state and federal leaders in crafting policies that can assist with the current pandemic, as well as future pandemics.

Own Risk and Solvency Assessment, or ORSA, is a framework heralded by the NAIC. Why should risk and insurance professionals look to ORSA reports for guidance?

DA: ORSA reflects how our insurance market, along with other majors of our economy, evolves over time and responds to new and emerging risks. It’s a constantly changing environment that regulators are trying to evolve along with, and our teams here in the insurance departments are trying to make sure that we stay ahead of the curve in terms of identifying those emerging risks.

The ORSA report is a glimpse into the thought process for our larger companies and groups into the boardroom and into the C-suites. [It features] theories on their own risk and how their unique position in the marketplace might expose them […] and require them to take steps to mitigate those risks. It’s a really critical piece of information for regulators to have as we build our own supervisory plans, going forward. Obviously, the pandemic that has occurred—like with any catastrophe—potentially highlights things that may have previously not been considered.

Let’s talk about force majeure. The pandemic has inspired new legislation to be drafted that affects the language of insurance policies in an effort to cover interruption. Where does the NAIC stand on that?

DA: NAIC sent feedback to Congress early on, in early to mid-March, with our thoughts that requiring carriers to cover losses that weren’t previously contemplated under the policy forms could do a lot more long-term harm than short-term good.

We have seen some state houses file state legislation that would be similar, in that it would require carriers to cover business interruption losses even if the policy forms didn’t contemplate that. We’ve sort of left it to individual insurance commissioners in those states to work with their legislatures on what’s best for their market.

Hurricane Laura Leaves Destruction—and Pandemic-Related Recovery Challenges

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Hurricane Laura made landfall in the United States at 1 a.m. on Thursday, hitting Louisiana and Texas as a Category 4 storm with maximum sustained winds of 150 miles per hour and what National Hurricane Center officials called “unsurvivable” storm surge. In such ferocious wind, thousands of homes and businesses were damaged or completely destroyed, hundreds of thousands were left without power and, as of Thursday evening, at least four people had been killed.

While forecasters initially expected the storm to lose intensity before reaching land, it rapidly intensified this week, becoming one of only 10 hurricanes to make landfall in the continental U.S. with winds over 150 mph since modern recordkeeping began in 1851. After windspeeds nearly doubled on Wednesday, officials in Texas and Louisiana ordered several hundred thousand people in the storm’s path to evacuate, but many were either unable to leave or chose not to. Increasingly severe storms in the area in recent years may have left some feeling prepared or resigned to ride out the storm.

Others faced difficulties related to the pandemic. As Risk Management recently reported, many experts have expressed concern that the COVID-19 pandemic could significantly complicate hurricane season this year, increasing the risk to individuals and businesses and making disaster recovery more difficult. Ahead of Laura, NPR reported that emergency shelters had a hard time safely accommodating evacuees without overcrowding and had to direct many to hotels. Pandemic-related job losses may have ruled that option out for some. Mayor Nic Hunter of Lake Charles, which was particularly devastated in the storm, told NPR that he “suspects the coronavirus pandemic and economic hardship are leading many people to take pause.” The outlet also reported that experts are concerned that mass evacuations from the hurricane could lead to new outbreaks in the region.

Now, the recovery process will undoubtedly be impacted by the pandemic as well.

“The global health crisis is going to have a major impact on recovery from any major storm, including Hurricane Laura—the stress of natural disaster becomes more intense when it unfolds against the backdrop of a highly contagious viral outbreak,” John Dickson, president and CEO of flood insurance provider Aon Edge, told Risk Management in the wake of the storm on Thursday.

For example, he said, “If you think back to hurricanes like Katrina (which hit about 15 years ago almost to date) and create a mental image, you see the community banding together to respond in close physical proximity. Similar images emerged from last year’s prolonged flooding along the Missouri River. In those and other events, assembly lines formed to fill and deploy sandbags—a task impossible to do six feet apart.”

Dickson noted that technology increasingly used by insurers (also known as risktech) would be more important than ever in responding to natural disasters this year as emergency response must be balanced with safe social distancing practices.

“Smart phones and basic technology can help homeowners achieve the recommended preparation steps and stay safe during a storm,” he advised. “For example, taking pictures and videos with date and time stamps could minimize the need for on-site inspections and physical proximity to claims adjusters.”

For insurance professionals, he noted, “The insurance industry is thinking through very tactical steps to ensure policies and procedures are in place to protect those who are on the frontlines when a hurricane hits. Drone technology offers the opportunity to take photos remotely, and computer models help better quantify risk and manage work forces.”

For more insight and actionable guidance on risk management for hurricanes and other natural catastrophes, including disaster preparedness, recovery and insurance, check out the following pieces from Risk Management:

Before Disaster Strikes: How to Prepare for Natural Catastrophes
How does an organization ensure it is prepared to minimize losses and recover quickly following a natural disaster? Long before a disaster strikes and property damage occurs, the best response plans begin with careful negotiation and placement of well-defined property coverage. Read more

Key Considerations for Disaster Planning
Meticulous disaster response planning has never been more critical. When developing a plan, it is important to involve key stakeholders and review every step that your business, your network and your vendors must take if a natural catastrophe impedes operations. A strong plan should address these key questions. Read more

Weathering Hurricane Season During the Pandemic
Pandemic-related social distancing guidelines and supply shortages could make it harder for business owners to protect their properties should a storm happen, making it even more important to have an action plan in place. These key considerations can help businesses owners mitigate potential storm risks amid COVID-19. Read more

Understanding Post-Storm Business Interruption Coverage
Whether in the impacted area or beyond, businesses suffering from supply chain disruptions after hurricanes and other storms should look to their property insurance policies for contingent business interruption coverage. Read more

Natural Disaster Planning During COVID-19
As the COVID-19 pandemic continues, government authorities and disaster-response entities are over-extended and may not be able to provide assistance as readily this year. It is more important than ever that companies make backup plans and assess the potential impact of shortfalls in their disaster response protocols. Read more

The Human Element of Disaster Recovery
Crisis and disaster recovery plans offer a critical advantage when catastrophe strikes, helping mitigate the impact on facilities, information systems and equipment. Just as important, however, is considering how a disaster can affect the company’s workforce. Read more

Ensuring Insurance Recovery After a Hurricane Loss
These seven tips can help policyholders resolve disaster insurance claims in the wake of hurricanes and other natural catastrophes. Read more

Hurricane Preparation and Recovery Tips for Businesses

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hurricane dorian disaster preparation

The first Atlantic hurricane of the season is rapidly approaching the mainland United States, with experts currently expecting Hurricane Dorian to make landfall in Florida on Sunday. For businesses both in the storm’s path and beyond, it is important to take the opportunity to consider how to protect property from hurricane damage before and after storms. The Congressional Budget Office estimates that, on average, hurricane damage costs $54 billion annually, and even at this late date, there is always more businesses can do to try to mitigate such losses and damage to their property and operations.

One of the simplest steps is having an accurate replacement cost and business income valuation. If valuations were conducted previously, consider how long it has been and any significant changes, such as assets or location. It is also important to document the property before a storm arrives, including taking photos and videos, or even using 3D-mapping technology to record a detailed account of an entire space, building or structure. Most importantly, confirm with the insurer that the policy is current and that the terms, conditions, and limits are all well understood.

Creating and practicing a detailed disaster plan is another important step. Business owners can use risk modeling programs, which run a range of potential scenarios digitally to flag issues and create a more holistic plan. If digital modeling is unavailable, walking through or rehearsing plans can help identify potential issues. For example, built-in hurricane shutters are great, but if they are not tested ahead of time and then malfunction in the hours before a storm, it may be too late to find an adequate solution. When tailoring the disaster response plan, also consider the available coverage to limit out-of-pocket expenses after a storm. Coordinating with your insurance professional is the best way to minimize uninsured expenses.

One critical factor for any business disaster plan is how to protect data, including business data as well as plans and building layouts. House these valuable documents in a secure location in case of physical damage to the main data storage unit or computer drives. Insurance companies will likely request very specific information to process any claim, so speak with an insurance company adjuster in advance to determine what types of documents they need for filing a claim, then store those in an easily accessible online portal.

Create a business continuity plan that addresses how to expedite recovery or avoid interruption, potentially including employing an off-site workforce, creating an alternative workspace, and locating backup suppliers.

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It should also always include a communication plan so that key players remain connected. Business owners should engage with critical vendors and emergency responders in advance to assist with loss mitigation, temporary repairs, and restoration. Following a wide-spread catastrophe, these vendors are in high demand and having a preexisting relationship will help.

Once the storm passes, the first step must be communication: contact everyone to address safety concerns and identify their needs. Phone lines and internet service are often unreliable following a storm, and business owners should be prepared to use multiple forms of communication, from texts to emails and applications that use Wi-Fi.

After reestablishing contact, quickly document the damage (ideally in both photos and videos) since demonstrating the extent and cause of loss becomes increasingly difficult over time. Policyholders should notify their broker and insurance company of the loss immediately, and once damage is documented, policyholders must reasonably and with due diligence preserve and protect property and commence restoration while mitigating future risk. For example, if a structure suffers roof damage, but no action is taken to “reasonably and quickly” provide temporary cover, rain damage following the storm may not be covered as part of the storm’s damage.

Finally, it is critical to log all logistical and monetary details.

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After a hurricane, there may be challenges accessing damaged areas, so retain all notices, civil orders or police mandates concerning any access limitations to later provide the insurance company. An insurance company cannot expect a policyholder to put a tarp on a roof if access was prohibited. Likewise, policyholders should track all expenditures. After a disaster, the price of restoration services can increase dramatically, so acquire and keep multiple estimates of any cleanup, construction, or emergency service needed. Having these estimates will allow policyholders to assert the cost was both reasonable and necessary and receive reimbursement.

Hurricane season is already here but it is not too late to take preparative steps to help protect your business from the often unpredictable effects of storms. The only things business owners can control are the steps to help prevent and recover from damages.