Mohit Pande, Head of Property Underwriting for US & Canada at global reinsurer Swiss Re, has warned of the pervasive challenge of inadequate valuations of physical assets for property policies, and has proposed some potential solutions to the issue.
Undervaluation of assets results in a shortfall of premium collected, which in turn hinders the ability to rebuild fully after a loss, Pande wrote in a recent piece for Swiss Re.
Ensuring value adequacy thus helps avoid costly surprises at claims time and puts the industry on more solid footing when it comes to capital management and balance sheet strength.
“Value adequacy has always been an imperative, albeit at times overlooked, aspect of property underwriting,” Pande noted. “However, recent events such as the COVID-19 pandemic, outsized inflation, supply chain issues, demand surge, and shortage of skilled laborers have magnified the importance of the issue.”
“The presence of these economic forces means that insureds and brokers are reporting woefully inadequate replacement costs to insurers. Insurance companies charge rates based in part on these reported values and collect far less premium than necessary, which leaves them holding the bag after a large loss.”
One possible remedy proposed by Pande is the introduction of provisions in contracts that protect an insurance company from undervaluation, or even possibly penalize the insured for underreporting.
Examples could include a margin clause that limit payouts to a certain percentage of the values reported, an occurrence limit of liability endorsement, or a coinsurance clause charges the insured a penalty if the insurance purchased is not at least a specified minimum amount of the value of the risk.
Alternatively, an insurer could impose a percentage deductible instead of a flat deductible, especially if it bases that deductible on the value of a location at time of a loss rather than per listed unit of insured.
Pande also points to the growing popularity of vendor tools that can assess the accuracy of a valuation based on factors such as the square footage, year built, number of stories, construction, and occupancy of a property, although many such tools remain in early stages.
But the Swiss Re exec maintains that the best solution is education for underwriters, who he says will often tend to roll forward exposures when renewal submissions come in without fully understanding the importance of an inadequately valued risk.
“This is where insurance companies need to make valuation a priority,” Pande concluded. “Accurate insurance-to-value is a challenge the property insurance industry will never rid itself of, and it’s never been more important to do so.”
