Getting it right: Property insurance values
Insurance-to-value (ITV) calculations are used to quantify the potential sum at risk and help determine the proper amount of premium to charge. It is absolutely critical for the long-term future of the industry that reported values represent the actual risk being underwritten. In both hard and soft markets, insurers need to continue to develop consistent contract language that encourages proper reporting of ITV.
The 2001–2005 insurance market saw tremendous primary rate increases due to losses from the 9/11 terrorist attack as well as deteriorating underwriting results from the soft market of 1997–2001. Arguably, overall rates were high enough to compensate for any deficiency in values. But when softening property rates combine with increasing loss trends, the industry needs to get back to underwriting basics and focus its attention on proper ITV. There were signs of a softening market prior to Hurricane Katrina, and it is possible that primary rates will begin to slip again once the shock losses of Katrina have been absorbed by the industry.
However, in both hard and soft markets, insurers need to continue to develop consistent contract language that encourages proper reporting of ITV. Unless adequate values are recorded, the industry may find that it has been charging inadequate premiums for the risks it underwrites – thereby jeopardising its long-term financial stability. File reviews show that physical damage and business interruption worksheets are repeatedly missing.
This paper addresses commercial insurance issues presented by ITV and outlines possible solutions. Content and general message expressed are valid globally. However, due to variations in terminology and differing insurance systems with regard to business interruption in paricular, some of the arguments brought forward need to be interpreted when dealing with property insurance outside the USA.
