Using indices to estimate reinstatement costs

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Using indices to estimate reinstatement costs for insurance has been a common practice by policyholders and insurance advisors. But this approach needs to be considered carefully and cannot always be guaranteed to arrive at the appropriate values to declare to insurers. This article highlights some of the issues.

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.