inflation + valuation: three tips to strengthen your risk management strategy

The Consumer Price Index (CPI) has increased by 8.6% in 2022, marking the largest yearly increase in inflation since 1981, according to the Bureau of Labor Statistics. While economic inflation is most commonly observed in the rising cost of gas, groceries and dining at a restaurant, it also affects commercial insurance. One specific area where organizations may feel this impact is in property insurance.   

Organizations with property and casualty insurance should be familiar with the “valuation” section within their policy. This section of the policy defines how property will be valued in the event of a claim. Being property valued ensures optimal recovery in the event of a property loss. 

With inflation on the rise, your organization may not be insured to value. As you may well know, replacement cost is how much it would cost to replace or repair a building with the same or similar materials. Influencing replacement costs are both labor—the cost to hire contractors—and the cost of materials. With the cost of materials and labor both on the rise, your organization may not currently have adequate valuation.  

Building materials prices increased 20.4% year over year and have risen 33% since the onset of the pandemic. And since the start of 2022, there’s been an 8% jump in building materials prices, according to the Bureau of Labor Statistics. The price index of services used in home building (including trade services, transportation and warehousing) went up 15.2% since the start of the year. 

Most property policies have a provision that accounts for a small percentage of inflation. However, the cost to replace a building today may already be more than the inflation guard on your policy. Labor and supply shortages have not only caused costs to increase, but the pace at which that increase has occurred has also been more rapid than usual, as well.    

Here are three considerations as you build your strategy in response to the effects of inflation on your building valuation: 

1. REVIEW YOUR POLICY  

Many businesses only look at the fine print after a claim occurs when it is already too late. Make sure you understand how various potential claim scenarios could play out and that you are not left on the hook for something you thought was fully covered. 

It’s also important to make sure that replacement cost coverage is part of your policy, and where possible there is no co-insurance. There are some instances where it makes sense to have alternative valuation clauses for a property (actual cash value as an example), but most commercial properties are best protected with replacement cost coverage. 

2. ENSURE THE REPLACEMENT COST ESTIMATE IS ACCURATE 

As mentioned, the costs of construction materials can alter the replacement cost estimate quite a bit.  Third-party estimation tools along with replacement cost appraisals are available and accessible for determining valuation. Additionally, survey access and third-party tools are used by insurance carriers to identify alignment or misalignment with your valuation. If your building differs from this, the estimated values may need to be adjusted. Determining adequate and accurate valuation positions your organization well, both in providing confidence to you that you are adequately valued and in establishing alignment with your insurance carrier. 

3. REASSESS ON A RECURRING BASIS AND WITH EACH RENEWAL 

Building valuation will continue to change in the foreseeable future. It would be wise to reassess your replacement cost valuation on a recurring basis (i.e., semi-annually or quarterly) as current inflation trends continue. Even if you have recently renewed, make sure that your replacement cost estimate is adequate. Contact your MJ risk management consultant to begin discussing upcoming renewals be prepared for renewal and for assistance with valuation-related matters. 

To learn methods for strengthening your risk management strategy and ensuring you have an accurate valuation in your policy, contact MJ today.