Reporting accurate property and business income ("BI") values is one of the most important, yet one of the most daunting, aspects of a building a property insurance program. To help you better understand this topic, below are answers to some common questions asked of our account teams about values reporting.
Why are accurate values so important?
There are the obvious reasons. If values are over-reported, insureds may be paying too much premium. Conversely, if insureds under-report, they may not have the appropriate coverages in the event of a loss (i.e., policy limits). Values are the foundation upon which we determine the client's exposure along with how we manage that risk through coverage terms and loss prevention engineering.
What do values have to do with risk improvement?
The process of reporting accurate values can lead to a better understanding of the client's exposures if they were historically calculated incorrectly. Insureds and insurers alike both need to know their value at risk, and in doing so utilize that data to make informed risk management decisions. As an example, our engineering loss estimates will factor in the expected period of interruption and corresponding Business Income exposure. This can be critical in helping companies to develop business cases for capital expenditures and prioritization of physical risk improvement recommendations. Without knowing the true value at risk at a site, insureds are often left guessing or misplacing effort on matters that could have a critical impact on the sustainability of their operations.
What do I need to know about trending?
For property values, not BI, either a replacement cost new-appraised value or the new, undiscounted purchase price is an acceptable base for applying trend factors. Care should be taken in the case of acquisitions where the purchase cost generally reflects the amount paid for assets, which may not be the true replacement value of the assets.
Because of the fast pace of change in processes and technology, a new set of base values should be re-established every 10 years. During the intervening years, appropriate trends should be applied to keep those base values current. All physical changes (additions and deletions) must be considered annually, and the total values adjusted accordingly.
Does AFM provide appraisal/valuation services?
Our account engineers have access to proprietary property valuation tools. We also partner with respected third-party appraisal firms that our account engineers use to generate valuation reports.
FM Global's Business Risk Consultants can also assist insureds that have complex business models.
What other resources and help does AFM offer?
We offer many educational materials that detail various valuation topics, such as:
- Property valuation methods—Replacement cost new or actual cash value
- Business Income Values vs. Business Interruption Exposure
- Deductibles—Actual values vs. reported values
In addition, we offer brokers and clients a free one-hour online class called "Reporting Accurate Values." It is available through the AFM Training Center. For more information on this class or these materials, contact your account team.
Also, AFM can provide a template to help clients determine BI values for their organization. You can access the template electronically on AFM Online, our extranet, or you can request it through your production underwriter.