When posed with the question around methodology, “how were the values reported in your Statement of Values (“SOV”) calculated”, risk managers, brokers, and property placement specialists, generally come back with a range of responses. Based on these responses and a quick assessment, the risk inherent to the current methodology can be identified. From there, a qualified appraiser with insurance valuation experience can provide feedback on the best practices to shore up the reported values or streamline the process.
Some typical responses and the recommended course of action:
“I’m not sure where the values came from.” This is a common response and typical to a risk manager replacing a predecessor who did not have well documented processes or reports. Other times, facilities have been acquired and the values were inherited (Note, when this happens, the value provided can easily be related to the fair market value and not the insurable replacement cost). Or the value can include all the acquisition costs including land.
“We apply industry trends to the previous year’s values.” Trending the previous year’s value can be appropriate if the SOV values and baseline data are accurate and detailed and the appropriate micro, industry, and class trends are utilized. If a valuation has been completed in the previous three to five years, it is appropriate to apply micro trends, but you still must be vigilant of asset additions/deletions, technology changes, etc. A common misconception is that one industry trend fits all and a company will apply a single industry trend to buildings or contents, or both. When adjusting for additions, one must be careful not to include capital costs that have no bearing on insurable values like repairs, maintenance, and rebuilds.
“Another department had an appraisal completed, so we are using that”, “our engineering department provided values”, or “we applied a cost per square foot based on recent construction.” Each of these methodologies can lead to a false sense of security. Appraisals are completed for many different purposes and if not done specifically for insurable values it’s not likely correct for your submission. When internal estimates of value are compiled, they can contemplate the cost for betterments or the cost to remove the old asset. This estimate may also fail to account for indirect costs such as freight, installation, and taxes. Another common mistake is when a company applies a cost per square foot from recent construction. In this scenario, there is no consideration for economies of scale, the differences in construction costs from region to region, or that the construction materials and parameters can vary widely from structure to structure.
If you are questioning your current values or the process that you undertake to update your values, we’d be happy to discuss your situation and provide you with some feedback. Feel free to contact Mark Crites at 404-513-8990 or email@example.com