Avoiding underinsurance: The key to accurate values

Being underinsured is a larger issue than most people realise, and the consequences in a worst-case scenario is that the insurance policy held by a company can be insufficient to cover the damages incurred. This means that rebuilding or purchasing equipment, while maintaining operations after a loss, might no longer be possible. In this article, you can read about the parameters that impact values the most and receive expert advice from Daniel Martin-Vivaldi, Senior Property Underwriter at If.

Having the correct values helps secure your business 

According to Daniel Martin-Vivaldi, companies benefit from using an external appraisal company to achieve the most accurate valuation of their assets. However, this has not been common practice in the Nordic market in recent years, probably because industrial companies have not been obliged to conduct regular reviews of their property and assets, unlike countries like Holland, for example.  

Says Martin-Vivaldi, “Although it is not a requirement, we advise our clients to make use of external appraisal assistance for their different sites with 4-6-year intervals between appraisals. We also advise proper indexation to make sure that the values are as accurate as possible at all times. Our experience shows that the most accurate values are often calculated after a full site visit, with the valuation conducted by an external appraisal company. Having people visit the site and walk around checking everything is the optimal solution and will increase the likelihood of identifying and ensuring accurate values.” 

There is no one-size-fits-all solution

“We know very well,” continues Martin-Vivaldi, “that  companies have limited budgets, and we recommend starting with a more basic desktop analysis. The appraisal company will use all available information including site drawings, risk survey reports, satellite pictures, production flow diagrams and fixed asset ledgers, for example.

Depending on the quality of the material they receive, the appraisal company should be able to provide a good indication of the property values at the specific site. Upon reviewing the shared material, any discrepancies between the insured values and desktop research results are easier to locate.

Daniel Martin-Vivaldi
Daniel Martin-Vivaldi, Senior Property Underwriter at If

Nonetheless, at If, we highly recommend on-site visits, though we acknowledge the value of desktop analysis to be a valuable starting point. If the desktop appraisal indicates that the values are accurate, then further analysis might not be considered necessary. However, if the desktop appraisal shows that there is a significant gap between the estimated and the actual values, then we strongly recommend conducting a full on-site appraisal.” 

 A common misconception is...  

“Something we see quite often is that values are registered with the purchase price, which can sometimes be 10-15 years old. The actual value should always be calculated as the replacement value as of today. The biggest challenge relates to companies with large, heavy and often old machinery. Such machinery would probably, following a loss, be replaced with a very different piece of equipment performing similar operations and therefore it is difficult to estimate the replacement value in advance.

Replacement values for buildings are in general much more straightforward as this is more standardised, but there can be a variation between countries due to labour costs and the costs of building materials, amongst other things,” Martin-Vivaldi adds. 

Underinsuring Business Interruption 

“Looking beyond property and assets, we also see a significant number of companies and organisations that have insufficient Business Interruption (BI) cover. Calculating BI values is an area where we can support our clients based on our extensive data and existing expertise in this field.

At If, we have a very experienced Business Interruption Competence Centre who have developed the tools required to support BI assessment. The knowledge and research that comes from the BI Competence Centre is of high value to us but is also an excellent resource for our clients. Having this expertise in-house makes it possible for us to secure our clients’ business, by ensuring full compensation during the time it takes to rebuild and get back into business following a business interruption loss.,” states Martin-Vivaldi. 

Following a fire you find out that you are underinsured – then what? 

“For many years, as an insurance company we have been rather generous when issuing leeway clauses. This refers to incidents where even though there is a case of underinsurance, the clause protects the client with an additional 20%, or another maximum, to match the actual values. Looking ahead, however, I am sure that the focus will be on getting the values accurately insured first and foremost, as such allowances will be much more restrictive going forward.

I envisage that there will be fewer leeway clauses issued due to an increasingly number of underinsurance cases year on year. Ultimately, we are looking to have accurate values that will bring security to a company and minimise the risk of business interruption. So, understanding the correct values of raw materials, replacing business critical equipment and rebuilding damaged electrical installations or systems is going to be increasingly important,” concludes Martin-Vivaldi. 

Written by

Caroline A. Bødkerholm, If