Maintain ITV in a volatile market with property-level insights

August 28, 2023 / 4 min read

Maintaining insurance-to-value (ITV) remains challenging for property insurers in today’s volatile market. Cost increases driven by post-pandemic inflation, recent catastrophes, and homeowner renovations make it difficult to provide reliable reconstruction cost estimates and ensure adequate coverage for policyholders.

property-level insights

As homeowners adapt to these economic conditions, property changes will become more common, and insurers must adapt accordingly to provide adequate coverage for policyholders.

Property insurers must remain laser-focused on the changes affecting their risk portfolio and leverage current, component- and property-level insights for reconstruction cost estimates to help them stay profitable and maintain ITV.

Continued wildfires compound market pressures for property insurers

Inflation reached a 40-year high earlier this year, with increased labor and material costs reverberating throughout the supply chain. The fallout from wildfires adds strain, too, as materials burn in the affected areas and rebuilding impacts supply and demand pressures.

Even more alarming is the extent of the damage these wildfires have caused so early in the season. The 2017 Canadian wildfires destroyed 300 residential and commercial structures and more than 3 million acres of land. So far, the 2023 fires have burned nearly 34 million acres and destroyed hundreds of structures. The 2023 wildfire season is already the most destructive since modern records began in 1983. Just as the 2017 Canadian fire increased prices through the summer of 2018, Verisk expects similar increases will hit this fall and continue through the summer of 2024.

Wildfires in Hawaii also add increasing complexity. Lahaina, the main region impacted by the Hawaii wildfires, showed 42.8% higher reconstruction costs compared to U.S. national levels in the lower 48 states as of August 2023.

Rising property changes drive higher replacement costs

Fire season isn’t the only factor hardening the market. Verisk also monitors the increase of property-changing events on residential properties and how those trends affect ITV.

Property changes include renovations, remodeling, and home additions. Each event affects replacement cost values for an insured property, and research shows such activity is rising. A recent Verisk study on coverage-impacting events indicates that the average homeowner undertakes a renovation project every 4.1 years.

The study found that nearly 2.5% of all residential properties have had some property change over time. The impact on replacement cost value can be significant, depending on the type of activity.

For instance, property change events impacting Coverage A include:

Deck installation. 9.7% of residential properties have a deck. Installing one can affect Coverage A costs by 3% to 9%.
Renovations, remodels, and additions. 3.4% of residential property owners have undertaken one of these property changes, which can impact Coverage A by 5% to 10% per room.
Solar panels. 2.6% of residential properties use solar panels, which can impact Coverage A costs by 6% to 8%.

Coverage-B-impacting events include:

Pool installation. 6.7% of homeowners have installed pools, which can impact Coverage B by 40% to 124%, depending on the type and size of the pool.
Detached structures. 11.3% of residential properties have a detached structure, such as a garage. Construction can increase Coverage B costs by 2% to 12%, depending on size and materials.

Homes are changing as homeowners maintain livability and adapt to their families’ growing needs. In today’s economic environment, renovating or adding to a current home may be more cost-effective than moving to a new house with a higher mortgage. As homeowners adapt to these economic conditions, property changes will become more common, and insurers must adapt accordingly to provide adequate coverage for policyholders.

Maintain ITV by applying current, property-specific data to cost estimates at renewal

Catastrophe- and market-driven volatility have significantly increased costs in the construction industry—making it challenging to forecast premiums and manage claims. Whether it’s accounting for catastrophe-induced demand surge in prices or the effects of home renovation projects, insurers need reliable, up-to-date estimates to update building costs at renewal to maintain ITV and ensure adequate protection.

Traditionally, insurers applied a general factor or percentage increase to an existing policy to update replacement cost estimates. But an index may not capture property-specific replacement costs in an unpredictable market.

Research shows that index-based valuations can be off by as much as 4% in just three years from the original calculation. Those deviations compound year after year, increasing to approximately 7% by the fourth year and about 11% in the fifth. Such a margin of error can leave policyholders underinsured and result in premium leakage for carriers.

Instead, insurers can recalculate estimates for in-force properties at renewal with component-based, ZIP code-level cost data. Verisk’s 360Value^®, the most current database in the industry, can help deliver granular, insights-driven replacement cost estimates.

360Value is updated monthly, localized to 431 key cost regions and at the ZIP code level for taxes. Verisk collects information from surveys, direct data feeds, claims analyses, and communication with 92,000 claims and building contractors to align estimates with current market prices and soften inflation-driven spikes. Its component-based calculator leverages the same building cost database as Verisk’s property estimating solution, Xactimate, to account for all costs needed to reconstruct a property to its original condition—from labor and materials to permits and fees.