Pitfalls in Valuation Can Be Detrimental to Stability, Advises GE Solutions

Commercial property values must be correctly quantified by agents, brokers and customers so that insurers are able to charge adequate premiums for the risks they assume, according to Tom Smith, vice president, regional product leader, for GE Insurance Solutions.

Smith has authored a white paper called “Getting It Right:
Property Insurance Values” in which he highlights the dangers to
insurers as well as customers of under-valuing property and business
interruption risks.

“Insurance-to-value (ITV) calculations are used to quantify the
potential dollars at risk and help determine the proper amount of
premium to charge,” said Smith in his paper. “It is absolutely
critical that values represent the risk being underwritten in order to
assure the industry’s long-term financial stability,” he added.

The enormous industry losses inflicted by this year’s hurricane
season “have created a new benchmark for what is possible with
catastrophic exposures,” he said. “Such industry losses demonstrate
the importance of adequate ITV calculations: underwriters cannot set
sound technical prices if they do not receive accurate values for the
properties they insure.”

Smith said that industry experts often cite technical pricing,
terms and conditions, deductibles, limits and catastrophe accumulations as the vital components of underwriting. “Unfortunately, adequate ITV is often not a priority, despite the fact that it has a significant influence on a company’s profits.”

He emphasized that the problem of inadequate ITV is not only an
issue for insurers; it also can be detrimental for homeowners who are
underinsured.

“Many insurers of homeowners continue to offer ‘Guaranteed
Replacement Cost’ coverage — but generally it is only provided in
their ‘preferred’ programs and it is limited to a modest amount
(usually 20% to 25%) above the actual amount of coverage purchased,” Smith continued.

Although inadequate ITV is a greater issue in softer markets,
Smith said it’s important that insurers develop consistent contract
language that encourages proper reporting of ITV in any part of the
insurance cycle.

There are too few incentives for agents and brokers to report
adequate ITV, he said. “Higher insurance values mean higher premiums; agents and brokers are obviously looking to keep premiums as low as possible, which can affect the assessment of ITV. Further, few commercial insurance contracts contain penalties for the reporting of inadequate values.”

He noted that insurers also “play a role in the problem when they
renew a program at expiring values, rather than annually trending the
values and then re-appraising them every five to seven years.”

To download the white paper, visit www.geinsurancesolutions.com.