Brokers beware: High inflation may catch up to claims valuation software

Valuation models in software systems used by insurers to calculate replacement and restoration costs for commercial structures must be checked more often when inflation’s running high.

That’s because costs for labour, lumber, drywall, concrete and other construction materials can jump daily.

How often inputs need to be reviewed will depend on the specific tool a company is using, said Paul Gallately, assistant vice president of risk control with Travelers Canada.

“The most common tools used from an insurance perspective are typically updated on a quarterly basis,” he said. “And that normally will have the gap reduced to the point that any inflation [happening] in between, or any change in material costs, or other factors that impact the overall estimate, are accounted for.”

Given how rapidly prices are now rising, Gallately said brokers should consider asking vendors, insurers and other partners they work with about how often cost inputs are being updated.

“Make sure that [they’re] updated on a regular basis and are considering the region within the country, as well as inflation or shortages of materials,” he said. “Commonly, the tool will use new assignments quarterly. If it’s less [often] than that, [brokers] may want to ask a few more questions about the validity of the information.”

The current inflation picture also shines a light on the need for brokers to reach out to clients that own commercial real estate about updating insured values and making sure current policies don’t leave gaps.

While there’s no industry standard regarding how often a broker should engage with clients to update values, Lanny Hoang, managing director of construction and oil & gas with Travelers Canada said it should happen annually, at a minimum.

“It’s important to review all of these on an ongoing basis,” he said. “Individuals with large property schedules and/or high-value properties are people that may face a bit more increased exposure to the current inflation environment.”

Gallately agreed annual coverage reviews help achieve proper insurance-to-value ratios.

“Any customer that suffers under a loss, whether it’s a smaller building, or a larger company that has a lot of assets, it’s going to have an impact,” he said.

Another starting point for review could be policies with coinsurance clauses requiring buildings be insured for 80%, 90% or 100% of value, because any undervaluation can significantly impact the insured in the event of a claim.

“It may be easier said than done, but [consider] trying to identify if you have accounts that are based on the original construction cost or based on market valuations,” Gallately said. “If you have properties that haven’t been checked in several years, they definitely – just by the mere fact of regular inflation, never mind what’s been happening the last year or two – are likely going to have significant gaps.

“You really want to make sure you get closer to the truth to make sure that, if there is any kind of penalty, it is as minimal as possible.”

Feature image by iStock.com/vwalakte