Understanding trend factors and how to manage their impact on property valuation is crucial in today’s dynamic insurance landscape. As organizations navigate through market fluctuations and economic shifts, the replacement cost value of properties can experience significant increases over time, directly influencing insurance premiums and risk exposure.
Replacement cost value represents the expense required to rebuild or replace a property to its original state, considering current market rates for labor, materials, and related costs. In recent years, factors such as inflation, macroeconomic events, and market dynamics have driven replacement cost values upwards, necessitating substantial adjustments in property valuation trends.
As valuation consultants, we at Centurisk have noticed some interesting patterns in the way organizations — particularly states and risk pools — apply trending in their quest to balance both positive customer relations and risk factors. These common scenarios might help you determine the right path for your organization in the coming year.
Trend Factors Applied
When the recommendation is to apply 2%, 3%, or even 4% increases to replacement cost values annually, we generally see a fairly high adoption across our customer base. But once the valuation trend recommendations begin to near 10% or move into the teens, we see people start to opt for more creative approaches.
And we get it! For a risk pool, hitting your members with a 15% increase in total insurable value and the corresponding increase in premiums doesn’t sound like a very nice thing to do. So, it can be common for pools to assume some additional financial risk by only applying a portion of the recommended trend to the replacement cost values. It’s a business decision that makes sense to us, if it works for you!
As valuation consultants, we are trained to prioritize accurate valuations. What does that look like in a world with major highs and lows in recommended trend factors? Let’s look at a couple of examples.
- SCENARIO 1: You applied a portion of the recommended trends in 2021 and 2022.
In this scenario, if you only applied a portion of the recommended trends in 2021 and 2022, it’s reasonable to assume your properties may be undervalued. We’d suggest that rather than apply the recommended small or negative trend in 2023, you apply a more positive trend to get closer to being insured-to-value. An analysis of what your property values would be if you applied the recommended trends annually versus where they actually are today can help you determine what increase you might want to apply this year.
- SCENARIO 2: You have been applying recommended trends annually for as long as you can remember.
In this scenario, it’s safer to assume your properties are close to being insured-to-value… if (and yes, that’s a big IF)… the original value you began applying trend factors to was accurate and there are no major unaccounted-for changes to individual properties. If you’re unsure, we’d recommend implementing a phased approach to onsite valuations where each property above a designated threshold is visited and valued over a five-year period. This cycle can be repeated indefinitely to ensure you’re maintaining an up-to-date, accurate statement of values.
- SCENARIO 3: You are confident in your values and applying the very low or negative trend factor.
In this scenario, you’ve had an onsite appraisal conducted within the last five years (or are at least very confident in your starting value). Since then, you’ve applied all trends annually as recommended. It’s completely appropriate to apply the recommended low or negative trend to keep your insurable values accurate and up-to-date!
In our experience of working with nearly 100 risk pools and states, there are many more scenarios that exist. Our team is always happy to discuss additional scenarios and options for maintaining a reliable statement of insurable values. This includes complimentary SOV analysis, assistance with benchmarking values, helping define valuation project scopes unique to your needs, and more.