Using indices to estimate reinstatement costs

Key highlights

• Asset registers are designed for accounting purposes – insurable assets may differ from those included in financial statements
• Changes to supply chains, technologies and market sentiment can quickly influence costs
• Building regulations, environmental standards and construction methods are continually changing which may not be reflected in indexed historic costs
• Indices are generic by nature. Applying these to individual facilities or locations can present challenges and produce inaccurate results
• Modelling and indexation have a place when determining declared values, but caution is required and a regular independent review by qualified valuers can be an essential check and balance.

Conclusion

Accurate assessment of reinstatement costs using asset registers is always challenging, especially if the base accounting data is limited in terms of description, or if the entries are not fully representative of the insured assets. Even if the historic records are accurate, and sophisticated models are used based around applying the correct index to individual asset register entries, the resulting estimated values need thorough analysis, benchmarking and appraisal before they can be used as the basis for declared values. For example, computer equipment has fallen in cost over the last decade on a like for like basis, while at the same time the cost of production equipment has increased. So, how do you index a computer-controlled machine tool?

Choosing the right index is not always straightforward and requires a detailed knowledge of the subject assets and an understanding of the indices available. Conducting a regular independent and detailed insurance assessment is still the most defendable way to ensure that declared values submitted to insurers are correct and defendable.