At Charterfields, our team has decades of experience providing reliable insurance valuations to businesses worldwide. Below are the most common questions we get asked about insurance valuation methods.

What method is used for property, plant and machinery insurance assessments?

For property, plant, and machinery insurance, most property damage policies are ‘written’ on a reinstatement cost basis. Reinstatement costs represent the amount required to rebuild, repair or replace the damaged or destroyed assets with new items of similar value including allowances for professional fees and demolition and debris removal, taking into account all the factors that could influence these costs. 

Occasionally assets may be insured on alternative bases, for example actual cash value or indemnity value, but reinstatement is the most common valuation method.

How is the ‘reinstatement cost’ calculated?

To determine the reinstatement cost of buildings and civil works, a surveyor will typically conduct the following:

• Confirmation of areas: Surveyors calculate the gross floor area according to standard property measurement guidelines, which may differ from other valuation approaches or measurement standards (such as financial or property sales assessments).
• Assessment of Costs: Surveyors will assess rebuild costs taking into consideration recent costs for similar buildings, tender prices, material costs, labour rates and other factors.
• Component analysis: The building’s structural and aesthetic elements are analysed, including internal and external features. The surveyor reflects elements that may differ from average costs based on experience with similar structures, accounting for differences in materials, construction type and other building-specific features, e.g. heritage properties.
• Local adjustment factors: Local labour rates, regional material costs and site conditions (e.g. access and location challenges) are all factored in. As are conditions unique to the building’s location, such as topography and proximity to adjacent properties.

To determine the reinstatement cost of plant, equipment and contents, a surveyor will often conduct the following:

• Documentation of assets: Key assets are documented individually, while smaller items are grouped and assessed area by area.
• Cost analysis: Costs are based on databases of similar assets and discussions with suppliers, including production and origin details.
• Reflection of Foreign Exchange: Unlike property, currency exchange rates and trade tariffs can have a fundamental impact on reinstatement costs for contents and can vary significantly year-to-year.
• Local adjustment factors: Again local labour rates, regional material costs and site conditions that could impact installation costs (e.g. access and location challenges) are factored in.

For both property reinstatement costs and plant, equipment and contents reinstatement costs, surveyors include allowances for fees, demolition and debris removal. Professional fees can vary by region and asset types so need to be adjusted to the subject assets.

Do I need to include VAT in my Declared Values?

Value Added Tax can be complex and its inclusion in your declared values depends on specific circumstances. It’s important to determine the correct level of inclusion or exclusion within the overall declared value, as an inaccuracy could contribute to under-insurance, over-insurance or unnecessarily high premiums being paid.  

As part of our service, our team would consult with your finance department, or tax consultants, to confirm the correct approach.

How are multiple buildings treated?

For businesses whose portfolios have multiple buildings or cost centres, reports would usually show separate values for each building, helping with budgeting and managing insurance across different properties.

Figures can also be broken down between buildings, civil works, contents and IT equipment to ensure that they match to individual policy wording.

Can reinstatement cost assessments be done without a visit?

Desktop assessments can sometimes be a reasonable approach for standard assets, but we always recommend on-site surveys since these are likely to yield more accurate declared values, reducing the risk of under- or overvaluation. Here are some of the challenges you can face when using computer models to estimate reinstatement costs.

Site inspections provide a clearer understanding of a property’s specifics, including finishes and internal features that desktop models may miss. A site inspection can also often identify issues that may not be apparent from plans and documentation.

For large portfolios, surveyors might inspect a sample of locations and estimate values for the rest. However, the accuracy of this method depends on the quality of the data available.

Can I insure for a modern substitute for an older building?

You may decide that you would replace a brick building with a modern steel alternative if the original building is lost, and set declared values on that basis, but what happens in a partial loss situation. In practice insurers expect the declared value to represent a building’s original size, construction and materials. 

Listed buildings may also require like-for-like reinstatement due to their heritage value and the regulatory environment covering reinstatement. 

Failure to insure appropriately can leave a policyholder vulnerable. 

What happens if assets change after an appraisal?

Leading insurance assessment firms offer an annual review option to clients where they will review capital expenditure and adjust reported figures for a set number of years after an appraisal. This can be an effective way of keeping declared values updated over the period after a full inspection-led appraisal. 

If there have been substantial new construction, new locations added, or purchase/movement of contents assets, we would usually recommend a reinspection and update of the original assessment.

Get in touch for an insurance valuation

Regular, accurate insurance valuations are essential to protect businesses that have fixed assets from financial risk. Whether you’re an insurance broker, risk manager or insurer, our experienced team is here to help. We provide detailed assessments tailored to your needs.

Get in touch with Charterfields today if you have any questions on valuation methods, reinstatement cost assessments or if you would like a no-obligation proposal.

Follow us on LinkedIn to stay updated with more expert insights and answers to your insurance valuation questions. Don’t miss the next post in our FAQ series, where we’ll be answering questions on insurance coverage implications.

Read more:

• 9 key considerations when assessing reinstatement costs for insurance
• What are the implications of incorrect declared values in insurance?
• What to expect from an insurance valuation report
• What are the risks of incorrect declared values?

The post Everything you need to know about insurance valuation methods appeared first on Charterfields Limited.

It’s vital for those relying on the outputs of these models to be aware of these limitations to ensure that a model-based analysis produces the required comprehensive and accurate assessment. 

Some common weaknesses include:

1. Assumption Sensitivity:

Modelling often relies on generic assumptions on certain elements, such as construction type, base materials, building heights, site and soil conditions and construction labour markets. Small changes in these assumptions can lead to significant variations in the estimated rebuild costs.

2. Data Accuracy and Availability:

The accuracy of results produced by a model depends on the quality and reliability of the input data used. If the data is outdated, incomplete, or inaccurate, it can compromise the accuracy of the rebuild cost estimate. Getting accurate details on floor areas, equipment/contents and even site boundaries is usually not as straightforward as expected.

3. Complexity of Risk Factors:

Modelling and analytical approaches may struggle to incorporate all relevant factors, such as site topography, local building codes, site access constraints, conservation area regulations, environmental considerations, and potential economic changes. These complexities can significantly alter reinstatement costs and may not be captured in a modelled assessment.

4. Dynamic Market Conditions:

Fluctuations in local prices of construction materials and labour costs, as well as changes in market conditions, can affect the accuracy of rebuild cost estimates. Many creators of models use historic unit rate cost data from third party sources. The fact that this data is based on tenders or procurement agreements from 2 or 3 years ago can mean that these costs are not indicative of current costs.

5. Specialised or Unique Assets:

For machinery, or buildings with unique features or specialised functions, it can be challenging to find accurate benchmark data for modelling. Standard models based on averages cannot capture the intricacies or challenges of such assets.

6. Underestimation of Soft Costs:

Models may focus on tangible costs such as construction materials and labour, but they can often underestimate soft costs like design fees, permits, legal fees, and other associated expenses.

7. Inclusions and Exclusions:

How has a model accounted for inclusions and exclusions. For example with leased property, the terms and obligations in a lease in terms of responsibility for insurance and the definition of insurable assets can differ, and can change if a lease is renewed. Does a modelled value include for tenant’s improvements or fixtures such as mezzanine flooring, internal partitioning, HVAC systems etc. 

8. Dependence on Historical Data:

Models often rely on historical data to make predictions about future costs. However, this approach may not fully account for changes in technology, construction methods, or other factors that can impact costs over time.

9. Human Error and Bias:

Errors in modelling assumptions or biases in the selection of underlying data can introduce inaccuracies. It’s essential to critically evaluate the modelling process to minimise the impact of human error.

10. Lack of Local Expertise:

 Models may not fully capture the nuances of local conditions, regulations, or construction practices. Local expertise and site inspection led assessments are therefore often crucial for ensuring accurate assessments.

To mitigate these weaknesses, it’s advisable to use modelling and analytics as one component of a comprehensive approach that includes inspections, validation of underlying data, and a thorough process for evaluating the assumptions in the models used. 

Regular reviews and updates of models based on real-world data and experiences can also help improve their accuracy over time. If you’d like support with assessing reinstatement costs, see our insurance services for information on how our specialist team can help create a robust approach.

The post The Limitations of Modelling when Assessing Reinstatement Costs appeared first on Charterfields Limited.