December 02, 2019

December 02, 2019 | Broker News

Do your customers value their assets?

Accurate asset values are critical to property insurance. It can mean the difference between a customer recovering from a major loss or going out of business.

Insurers rely on correct values to set premiums, reinsurance retentions and risk appetite but, unlike a customer, they will not go out of business if the asset values are understated.

The importance of correct asset values to customers is, however, quite often overlooked.

Without accurate and up-to-date valuations of the organisation’s assets, it is difficult to correctly assess the performance of the business, determine the current value of the business and make decisions on the appropriate levels of insurance cover. Leaving aside the first two factors to the accountants and business analysts, the key insurance related factor involves the difficult issue of underinsurance.

Under insurance is an important issue for customers (and their brokers), both for the Property values as well as the Business Interruption values. The Business Interruption aspect is also critical and not always given the importance it deserves. This applies not only to the Gross Profit and Payroll figures but also an adequate Indemnity Period for the business recovery time.

In the absence of accurate asset values, it is not unusual for the values to be underestimated. The true impact of this under insurance is often only experienced when there is a large loss. This brings into consideration the averaging clause in most property policies and can result in only a partial claims payout, leaving the customer with a cash shortfall typically at a time of severe business stress. Averaging is designed to protect the insurer from gross under insurance and hence there is usually full protection if the valuations are not understated by more than 15 or 20 per cent.

Zurich Risk Engineers have a limited capability to help customers to identify under insurance. Through the experience of our team members and access to Building Cost data and international data bases, we can sometimes assist in the identification of gross under insurance. This is not a core function or capability of our Risk Engineering team and we certainly do not provide any detailed assessment or assurance of Sums Insured as part of our service.

Best practice for all customers is to regularly engage a professional valuer to review the current and replacement value of the company’s assets. For most industries, a three-to-five yearly valuation cycle is sufficient, remembering to adjust insured values for growth and inflation in the intervening years.