In April 2022, the British Chambers of Commerce quarterly economic study found that 70% of construction firms and 72% of transportation and distribution firms were expecting to increase their prices over the coming three months.

In the UK, the Office of National Statistics (ONS) shows overall costs for basic metals and fabricated products were up 24.2% in the 12 months to March 2022 . According to the US Bureau of Labor Statistics (BLS) , iron and steel costs were up 36% in the 12 months to March 2022.

Metal prices are projected by the World Bank to increase by about 16% in 2022 relative to 2021 and ease somewhat in 2023, while remaining at historically elevated levels. Nickel and aluminium prices are expected to increase by 52% and 38% respectively. 

These levels of inflation means there is a chronic risk that existing declared values are too low or will quickly get out of date.

Not only does this mean that ‘Day One’ declarations should reflect current costs but the loading factors for future cost movements (policy year and reinstatement period), and the sums allowed for demolition and debris removal, need close monitoring.

Policyholders ought to conduct careful analysis to arrive at accurate reinstatement costs, particularly when considering declared values for property damage insurance policies. It is vital to reflect the appropriate cost movements if updating previous declared values or historic costs.

If a formal independent assessment has not been carried out in recent history – three years being the recommended period between assessment points – then a review of values would be wise.

Inflation and insurance risk are here to stay it would appear. The temptation, to rely upon a previous assessment or internal estimate and just to index this for several years, could leave policyholders critically exposed. Access our full whitepaper here.

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Accurate assessment of reinstatement costs: key messages when using asset registers

Accurate assessment of reinstatement costs using asset registers is always challenging.

Most property damage insurance policies are on a replacement with new basis. This means that the insured must declare a value at risk that reflects the current cost to replace the assets with new on a like for like basis.  

Unless revalued, the net book value of a fixed asset in company accounts is typically based on the acquisition cost of the asset, less depreciation.

Historic costs or net book values therefore may have little correlation with the correct values to be declared to insurers under replacement as new policies.

More sophisticated analysis of the contents of fixed asset registers and indexing of historic costs using composite and focused specific indices may address some of these challenges but will not address all the reasons why historic costs may not reflect replacement. We have produced a specific whitepaper on the use of indices here.

This is especially true if the base accounting data is limited in terms of description or if the entries are not fully representative of the insured assets.

Moreover, asset registers often include items that would be considered as non – insurable or may omit third party assets where an equity position is not held but liability for insurance exists with an insured.

By their nature, published indices are ‘averages’ of cost movements. They will not reflect the characteristics of individual sites and the more bespoke or unique a location, the less relevant any published indices will be.

Conducting a regular independent and detailed insurance assessment is still the most defendable way to ensure that declared values submitted to insurers are an accurate assessment of reinstatement costs.

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Key highlights:

• Asset registers are designed for accounting purposes – insurable assets may differ from those included in financial statements
• Supply chains, technologies and market sentiment can quickly change, so modifying prices
• Building regulations, environmental standards and construction methods are continually changing which may not be reflected in indexed historic costs
• Indices are generic by nature so applying these to individual facilities or locations can present challenges

Conclusions

• Accurate assessment of reinstatement costs using asset registers is the most challenging it has ever been.
• This is creating problems for insurers, owners of assets, lenders, and insurance brokers alike.
• More sophisticated indexing models based around historic costs may address some of these challenges, but historic costs are rarely reliable and need thorough analysis before they can be used.
• Conducting a regular detailed insurance assessment, rather than using indices to estimate reinstatement costs, is still the most defendable way to ensure that declared values submitted to insurers are correct and realistic.

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