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The Royal Institution of Chartered Surveyors (RICS) currently recommends that a full Reinstatement Cost Assessment should be carried out every three years, or when there is a substantial change to a location. 

From this, many businesses believe that they are adequately covered because they had an assessment or valuation several years ago, or they haven’t changed their insurance policy term in recent years. However, three years is typically the period after which indexed values start to deviate significantly from actual reinstatement. This could leave businesses vulnerable to the risks of not being appropriately insured, or even critically underinsured. 

In this article, we will explore if this is still a sufficient recommendation in today’s world of volatile inflation and global instability as they impact property and asset values. Our aim is to help businesses understand everything they need to know about RCAs to avoid insurance gap risks, and move away from a “set and forget” approach to their insurance coverage. 

What is a Reinstatement Cost Assessment (RCA)?

An RCA is a professional valuation outlining the cost to either rebuild a property or replace assets “as new” in case of a total loss or if they were destroyed by an insured event. Reflecting the total reinstatement position ensures adequate cover exists to cover partial losses that are more common.

This value is different to the market value of the property or assets. An RCA takes into account current construction and asset replacement costs, professional fees and any specific requirements linked to the property to match with your insurance policy terms. The purpose of this valuation is to ensure that the property has the most appropriate level of insurance and will be protected in the case of damage or total loss. 

To carry out the assessment and reach a final value, a surveyor will consider: 

  • Costs of demolition 
  • Costs of site clearance and possible shoring up of neighbouring properties
  • Professional fees, such as architects, engineers, and surveyors
  • Statutory authority fees
  • Compliance with latest building regulations and planning laws 
  • Site-specific challenges, such as if it is a listed or heritage building, or if the property has access constraints

These assessments are essential in securing appropriate insurance coverage. Underestimating reinstatement costs can be particularly devastating for businesses in the event of a total rebuild or costly repair, as you may only be entitled to a part-payment of the overall reinstatement cost.

The setting of declared values is the responsibility of the insured. Some insurance brokers and even insurers may offer opinions on values or approaches to setting values but ultimately it is the insured’s responsibility to set the correct coverage.

When it comes to insurance valuations for commercial properties, the responsibility for arranging an RCA may fall to the building management company, the tenant or the property owner, depending on the lease terms. 

How can shifting global trends impact your insurance coverage? 

In today’s climate of ever-changing inflation rates, cost-of-living crises, conflicts, and political tensions – from the tariffs on U.S. imported goods to the Iran war driving up fuel prices – the cost of assets is quietly inflating. With how quickly and suddenly the world’s economy can shift from one event to the next, a Reinstatement Cost Assessment from even two years ago may now be obsolete or misleading. 

Here are some of the global trends impacting your insurance coverage: 

1. Supply chain disruptions

Geopolitical conflicts and subsequent conflict-affected trade routes can lead to delays and material shortages. Shipping times are doubled as longer delivery routes must be taken. This can drive up local reinstatement costs overnight as supply and demand is severely impacted from this disruption. Local suppliers and businesses running out of stock and waiting on extended delivery times has a direct impact on Business Interruption (BI) coverage. 

Moving forward, policyholders may need to ensure that Indemnity Periods are re-evaluated to reflect the reality of today’s global supply chain. This involves moving beyond just the asset cost and instead deeply analysing the recovery timeline with regards to the supply chain landscape. 

2. Currency exchange fluctuations

If a business uses specialist imported machinery or equipment, currency exchange rate changes can influence costs significantly. If declared values and coverage are in GBP, a drop in the value of the Pound against other currencies can make replacement costs in the UK significantly higher when considering the cost to replace the equipment “with new”. 

For example, costs due to foreign exchange (FX) movements alone have been known to increase by 10% in less than nine months.

3. Labour shortages

A decline in availability of skilled trades across the UK has pushed up construction tender prices, and this can vary regionally. 

In a post-loss situation, a firm may need specialist contractors immediately, but local firms may be fully booked for months. So, they may be forced to hire more expensive national or regional contractors. As a result, reinstatement costs can materially differ from recent costs for similar work or those used in an RCA from years ago. 

4. Inflation

As a result of these shifting demands, and fluctuating costs of goods are impacting the cost of living, global inflationary rates are constantly changing. As such, they should be closely monitored for the effect on insured values. 

Crucially, the Consumer Price Index (CPI) is not the same as rebuild cost inflation. While general inflation tracks food, mortgage and energy costs, rebuild costs are more influenced by building materials, transportation, contractor margins and labour. Therefore, it is necessary to adjust the baseline declared values for business assets using the correct indices. This will ensure your coverage accurately reflects the true cost of modern reinstatement. 

Reviewing the three-year RCA benchmark

In today’s economic and political state, waiting for a Reinstatement Cost Assessment every three years may simply be insufficient to ensure your insurance coverage is up-to-date. Depending on your assets, whether any material changes have occurred, and the reliability of any indices used, an RCA may be necessary sooner rather than later. 

When should an RCA be carried out instead? 

In the current global economic circumstances, we recommend that declared values should be updated annually. This doesn’t always require a full inspection and rebasing, but adjustments need to reflect the correct inflation, any capex movements and any other changes on site.

If necessary, a new independent full assessment should also be conducted if assets materially change. For example:

  • If the property has recently been extended, significantly renovated, or if the intended usage of the building has changed 
  • If machinery has been replaced, even if like-for-like
  • If there is a recent significant change in foreign exchange and your facility has a high degree of imported materials or machinery
  • If your building is listed or in a conservation area – the cost of reinstatement of specialist properties rarely tracks to standard tender price indices

Property damage insurance renewal checklist

To help businesses navigate today’s fluctuating climate and ensure they are adequately covered when the time comes to renew your property damage insurance cover, here is a handy checklist and key questions to consider: 

1. Review site changes: 

  • Have you added extensions, mezzanines, or outbuildings? 
  • Have you added or disposed of equipment or contents? 
  • Are any areas or equipment redundant?
  • Has there been any change to insurance responsibilities? For example, a new lease, change in rental agreements, new leased assets added, etc.

2. Check the asset register:

  • If you are using your asset register to update values, does your register match to what is actually located at each facility? 
  • Have assets moved? 
  • Have you expensed items that need to be insured? 
  • Are any assets redundant?

3. Assess inflationary loadings: 

  • Review with your broker if your current index-linking reflects construction inflation or just general inflation.
  • Is it still appropriate?

4. Audit lead times: 

  • In the event of a total loss, how long would it take to get back to operational capacity? 
  • Has this changed? This is important for Business Interruption coverage.

5. Consult a professional: 

  • If it’s been 3 years or if significant global/business changes have occurred, consider engaging a professional to carry out a new assessment to rebase the figures. 

Time to reconsider your RCA

A regular Reinstatement Cost Assessment is a crucial step in avoiding the risk of assets not being adequately insured. While the RICS recommends carrying out an updated RCA every three years, this could be the bare minimum. In the current volatile economic climate, it may be more appropriate to review your coverage more frequently. We recommend that businesses be aware and vigilant of their risk profile changing in an ever-changing world. 

At Charterfields, we specialise in reinstatement cost assessments. Feel free to get in touch with us if you’d like a no obligation proposal to assess your buildings and/or contents to ensure you’re adequately covered.