Inflation puts companies at risk of insurance gaps

The report, How Inflation Led to Property Insurance Coverage Gaps, found that many companies unintentionally underreport valuations of property and equipment to their insurance carriers.

The difference between those reported values and actual values means that companies end up with coverage gaps – which, in turn, means those companies might not collect enough of a payout to get their business running again after a claim.

Construction companies are especially vulnerable, according to the report. Many construction-related costs have spiked, from paint (up 26%) to wallboard (up 18%) to roofing contractors (up 21%).

“Companies must defend their values because underwriters are now requiring more data on how they determine asset valuations,” said David Rix, global sales manager at Global Risk Consultants. “A lot of companies aren’t prepared for that, meaning claims won’t pay for rebuilding or replacement costs.”

The report also includes:

Year-over-year inflation data related to construction and labour costs
Why rising construction prices lead to coverage gaps and inaccurate claims
Common mistakes such as relying on market value or valuations more than three years old
Frequently asked questions about insurance asset valuations
Best practices for establishing credible insurance values and SOVs in an inflationary environment

“Property valuation is a key foundation of property underwriting and impacts several aspects of the insurance risk transfer process,” said Peter Linn, vice president of risk engineering services at Global Risk Consultants. “This includes projected claims values, replacement costs, adequacy of coverage, and inflation considerations impacting future physical asset and BI values. Properties’ values that were appraised years ago may no longer be valid, which can leave companies under- or over-insured, both having cost and claim recovery ramifications.”

“If it’s been three years or more since you’ve assessed valuations, it’s time to get going,” said Justin Chen, global manager for property valuation services at Global Risk Consultants. “For companies with large real estate portfolios, updating the SOV can be a multi-year process.”

Inflation is a top concern for insurers, according to a recent report from Swiss Re. The issue particularly impacts middle-market companies in sectors like transportation, energy, construction and retail.

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