Following two catastrophic weather events in 2017 (Hurricanes Irma and Harvey), the property insurance industry was abuzz as the property market began to shift from soft to hard. Shortly thereafter, the COVID-19 pandemic affected global supply chains at an unprecedented speed and scale, and coupled with a dramatic increase in the rate of inflation, the insurance market firmly hardened.
Over the past few years, organizations of all types have felt the impact of insurance companies exiting certain classes of business, capacity decreases, and significant premium rate increases.
As the majority of policies are written on a replacement cost basis, keeping values the same at every renewal does not keep track of upticks in inflation.
The Meaning in Real Dollars
Since the beginning of the hard-market cycle, insurance renewal premium rates have increased by double digits year over year, in some cases by 30%–40%. Increases vary depending on the risk exposure factors (properties in catastrophe-prone areas) and on organizations’ commitment to risk reduction.
Dramatic increases in insurance premiums affect the bottom line, and the dollars at stake have significantly affected operational budgets. Accordingly, school business administrators are now taking a more active role in the insurance purchasing process.
Hurricane Ian, the Reinsurance
The property insurance market became even more entrenched in a hard-market scenario following the significant damage caused by Hurricane Ian in October 2022.
Reinsurers — companies that insure insurance companies — faced substantial losses after that catastrophic weather event; the losses had a cascading effect, limiting available capital and affecting the overall insurance market. This outcome created a “spillover” effect in that the losses experienced by reinsurers overflowed into the primary insurance market, and, as a result, insurance costs for the consumer increased.
Although losses from hurricanes in 2023 were less severe than those in 2022, other events, particularly flooding from convective storms, continued to affect insurers and consumers. Natural disasters—such as hurricanes in Florida and on the Gulf Coast, floods in the Midwest, and wildfires in the western states—affected the hard market; higher insurance costs and reduced available coverage disproportionately affected those in high-risk areas.
Insurer Pushback
Over the past few years, following those natural catastrophic events, insurers have faced significant losses from larger-than-expected claims. Claims are being adjusted and settled at much higher amounts when measured as a percentage of the policyholders’ original stated values.
To correct the trend, insurers universally became more disciplined in their underwriting standards; the focus shifted to questioning the accuracy of client-provided values and COPE data (construction, occupancy, protection, exposure data). The consensus is that underreported values not only lead to claims inflation but also reduce the premiums that insurers receive, resulting in a dual impact on profitability.
Underwriters have increased pressure on organizations to undertake regular independent valuation appraisals; otherwise, more restrictive terms and conditions (coinsurance penalties, margin clauses) have been added to policies for which underwriters are uncomfortable with the declared values.
The accuracy of insured values avoids additional costs to insurance carriers on claims that lead to litigation and the potential for client misrepresentation.
Districts must invest in the valuation and data collection process to differentiate their organizations and allay insurer concerns.
Client “Misrepresentation”
An insurance market where rates and premiums are increasing can tempt policyholders to keep declared values flat to reduce insurance costs.
As the majority of policies are written on a replacement cost basis, keeping values the same at every renewal does not keep track of upticks in inflation. Insureds may not intentionally underreport values to keep premium spending lower, but it has been known to happen.
The bottom line? If an organization knowingly underreports, an insurer can cite misrepresentation as grounds to deny a claim. Then again, it’s not always the insured’s fault.
During the prolonged soft market and before the heavy catastrophe years of 2017–2018, values were less of a concern to underwriters. Policyholders often reported the same values every year because underwriters didn’t pressure them to do anything differently. If an organization had no reported losses, the implication was that it had not experienced a situation where the declared values were deemed inadequate for reinstatement.
The Challenge of Insuring the Correct Value
Many sources are used to verify and validate values, but when significant changes occur in construction costs, transit costs, equipment, and labor costs in a short time, such as we have experienced in the current economic environment, the impact on replacement costs can be dramatic.
It is one thing to establish values, but organizations must also maintain accurate values, which can be challenging, especially for organizations such as school districts that are responsible for insuring large numbers and different types of properties.
An insurance-to-value analysis is not a single point-in-time exercise; it requires an ongoing commitment to adjusting and maintaining values year after year.
What Can School Business Administrators Do?
School business administrators should be prepared to meet the expectations of underwriters and insurance companies in today’s challenging property insurance market.
Districts must invest in the valuation and data collection process to differentiate their organizations and allay insurer concerns. The significant focus on valuations appears likely to continue into the future, especially in our current high-inflation environment.
Facility Appraisals
A facility appraisal plays a crucial role in the property insurance process, providing valuable information for both the school district and the insurance provider. Here are several reasons why a facility appraisal is essential:
- Accurate property valuation. An appraisal provides an accurate evaluation of the facilities, including buildings, equipment, and other assets. This valuation is crucial for establishing the value of the property to be covered should the insured file a claim for the full cost of replacement or repair in case of a covered loss.
- Risk assessment. Insurance providers use information from a facility’s appraisal to assess the risks associated with the property. This includes such factors as the location, construction materials, and potential hazards. A thorough appraisal sets the level of risk and guides insurers to set appropriate premiums.
- Policy customization. The detailed information provided in a facility appraisal allows insurers to tailor insurance policies to the specific needs of the property. This customization ensures that the coverage aligns with the unique characteristics and value of the facilities.
- Loss prevention and mitigation. A facility appraisal can identify potential risks and vulnerabilities, enabling the insured to take proactive measures for loss prevention and mitigation. That may involve implementing safety measures, upgrading security systems, or making structural improvements to reduce the likelihood of losses.
- Claims processing. In the event of a covered loss, the facility appraisal serves as a reference point for the insurance company during the claims process. It provides a clear and documented valuation of the property and its assets.
- Legal compliance. School districts have specific insurance requirements and regulations. A facility appraisal ensures that the district complies with these regulations.
- Renewal considerations. Insurance policies, which are renewed periodically, require an updated facility appraisal of the property as insurance providers reassess risks and adjust coverage and premiums for renewal.
Conclusion
A facility appraisal is a valuable tool for insurance purposes; it (1) establishes accurate property values, (2) assesses risks, (3) customizes policies, (4) prevents losses, (5) facilitates claims processing, (6) ensures legal compliance, and (7) looks at other renewal considerations.
All stakeholders should have access to updated appraisals and reliable underwriting data; all school districts benefit from being aware of their own risk exposures and being secure with the insurance limits they procure.