Opinion: Insurors scrutinizing property valuations, new exposures

Hunter Johnson

Since the beginning of 2020, businesses of all kinds have been dealt a seemingly never-ending set of unique challenges, including a global pandemic that created an economic shutdown, a record number of natural catastrophes and a difficult insurance market.

When COVID-19 safety measures ended in mid-2021, hopes that the worst was over were crushed when the global economy was presented with inflation that quickly rose to 40-year highs. This high inflationary environment combined with a tight labor market, lingering supply chain disruptions and political risk in Eastern Europe caused by the Russia-Ukraine war will have profound effects on the insurance market for 2023. It’s very probable that these current market conditions will have a more significant impact on the insurance industry than the pandemic itself did.

Carriers have been juggling several inflationary costs over the past years, even before the consumer price index “caught up,” including rising claims cost due to rapid advances in technology for goods, medical inflation, more frequent and severe weather events, and social inflation. But now, we are seeing additional factors that are impacting carrier profitability – such as increased labor costs, inflated revenues and payrolls that are artificially increasing the insured’s exposures, drastically increased materials costs due to supply chain shortages, and increased nominal wages driving higher settlement demands.

Most of these factors are outside of any individual insured’s control. But two areas of any renewal that an insured will have some input in are negotiating their property renewals and effectively communicating any increased liability exposures. 

This coming year, insurance companies will be placing increased scrutiny around property valuations. Most organizations have building values that were determined either in their first year with a new carrier or the first year after buying a building – and very seldom do they get updated by the insured afterward. At best, some insureds increase their limits by 3%-4% per year, at the behest of their insurance carriers, known as an “inflationary increase.” But we’re finding that these incremental increases have not been sufficient to keep up with increased construction costs. A recent study by the Marshall & Swift valuation service found that as many as 75% of businesses are underinsured by 40% or more. This phenomenon is getting more attention as the frequency of catastrophic weather events drive increased claims activity. At renewal, it will be important for insureds to work with their broker to help determine appropriate costs to replace their property in today’s market. This will likely drastically increase the amount of insurance carried but will save the insured in a big way in the event of claim.

The second item to address this year is to effectively communicate your increased exposures to the insurance marketplace. Due to inflationary price increases – or increased wages paid to employees as a result of market demands – many employers in our area are recording record revenues in 2021 and 2022. But this does not necessarily translate to more business activity. Insurance companies have for years tried various methods to figure out how to quantify their “exposure” for offering coverage to organizations. And it can be difficult to figure out how to price their likely claims activity. The most common method, depending on industry, is gross sales or payroll – with the logic being both metrics have a direct correlation to the organization’s liability exposure. But with both measures being inflated, the insured may find themselves paying an artificially high premium if they and their agent don’t adequately explain to the underwriter why sales increased. 

For example, if I produced 1,000 widgets in 2020 at a cost of $2 per unit, my insurance carrier would charge my liability premiums based off $2,000 in gross revenue. And if in 2022, I produced the same 1,000 widgets but now charge $4 apiece, my liability premium would now be based off $4,000 in sales. But a good argument can be made that my exposure, or potential for a claim to arise, out of my 1,000 units produced hasn’t changed.

Advanced discussions with your agent, and with the carrier, can help give your underwriter a better understanding of the business and potentially offset artificially higher sales with rate considerations.

Hunter Johnson is vice president of Alliant Insurance Services Inc., specializing in workers’ compensation, alternative risk financing and complex risk placement. He can be reached at hunter.johnson@alliant.com.