StempleCrites published in Insurance Research Letter

For the Insured; it’s more than just a Premium Calculation.

“Rate x (the importance of accurate insurable) Value”

Simplicity states that insurance premiums for commercial properties are set by this unassuming equation: R x V = Premium.

R, Rate, a numerical value, which correlates to the perceived level of risk inherent to a specific property.  V, Value, is the replacement cost (reported by the insured) of the property (building and its contents) being insured.

The level of risk is a measure (and modeled) based on key factors, i.e. COPE [Construction, Occupancy, Protection, Exposure] data.  COPE data is easy to figure out and report, at least the quantitative data anyway.

The other side of the equation is the reported Value. The Value part of the equation seems to be generally neglected, over simplified or its importance discounted.  Why? No matter the COPE, which does not generally vary, Value is constantly changing.  If the Value reported is too high (over insured) money is wasted in excess premium payments. Reported too low (under insured) can lead to the insured being out of pocket as a result of uninsured losses, not to mention future higher rates due to under reporting.

Either way, inaccurate or even the perception of unvetted Values reporting results in lower confidence in the underwriting process – producing vetted Values reduces uncertainty, allowing underwriters to price and provide coverage terms at their most competitive levels.

Hence, other than spending capital on risk protection systems, Value is the most cost effective and critical factor allowing you and your broker to procure the optimal property coverage and priced in the most advantageous way.

Think of all the decisions made based on Value.

  • When an engineer estimates a PML[1], MFL[2], they multiply the likelihood of loss times the report Value
  • When the underwriter models (RMS risklink / AIR Worldwide[3]), the output is based on how and what was represented in the Values, by building, by content, by location (along with appropriate COPE)
  • When deciding on appropriate limits and sub-limits, everyone is looking to the Values
  • When deciding if additional coverages are needed and their expense, the Value of specialties are needed (e.g. certain land improvements, underground assets like tunnels, specialty items like towers, shared resources, etc.) or conversely can be / should be excluded.
  • When self-insuring, the money “set aside” for a loss may be influenced by the Values (need to do financial modeling here) as well as traditional loss estimate
  • When analyzing which locations are “most important”, Value can tell you
  • Appropriate allocation of premiums to business units/location
  • When marketing property, every potential insurer is relying on the Values presented to understand the whole risk
  • When deciding on blanket coverage, Values for the largest location(s) is reviewed
  • After a loss reported, Value is the benchmark to which reimbursement is ultimately compared


The Value component impacts many different aspects of policy coverage and risk management.  How far off an insured is on its Values is directionally proportional to how far off they are in business and buying decisions.

Rate X Value? Yes, the right V is important.

  • PML – Probable Maximum Loss
  • MFL – Maximum Foreseeable Loss
  • RMS risklink / AIR Worldwide – most prevalent natural catastrophe models used within the industry

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