Skip to Main Content

Three strategies for reliable commercial property valuations

  • Monthly updates for the cost of building materials and associated labor can help insurers estimate reconstruction costs more accurately.
  • A way to better estimate a business’s equipment, furniture, and inventory that’s based on real-world claims can replace much of the guesswork of today’s methods.
  • Recalculating premiums at renewal with real-world costs can help avoid some of the pitfalls of indexing to values that don’t necessarily reflect market realities.

How confident are you that the most up-to-date, reliable pricing information is driving the replacement cost estimates for your book of business? And even if your claims lined up with your premium yesterday, are you sure that today’s rising inflation, higher costs for materials and labor, and shifting supply chain dynamics are accurately reflected in your valuations?

Updates for the cost of building materials and associated labor can help insurers estimate reconstruction costs more accurately.

Getting the most reliable component-based estimate on the books from Day One helps support ITV, protecting both the policyholder and the insurer. 

Competing effectively in today’s fast-paced commercial property marketplace means that “good enough” data isn’t good enough anymore. Here are three strategies for helping avoid outdated valuations that could leave you and your customers vulnerable in the case of a total loss.

1. Monthly pricing data makes the difference

Historically, reconstruction costs shift just 2 percent to 4 percent over a year. Since the pandemic triggered shortages of labor and materials, 8 percent increases have become typical. The cost to rebuild a commercial property today is 20 percent higher, on average, than pre-pandemic.1

For some materials, the spikes have been far more dramatic. Lumber, for instance, shot up meteorically, then tapered off, but is still at a historic high. The answer to help manage such drastic changes is more frequent pricing calculations. Instead of yearly—or even quarterly—recalculations, today’s changeable cost environment calls for monthly pricing updates.

Frequent updates can flatten the curve of these price spikes and be less jarring for agents quoting policies and property owners applying for insurance. Suppose an agent calculates the replacement cost for an office building on the last day of the quarter, and the insurer’s data provider hadn’t updated costs for three months or more. In that case, that agent might be in for an unpleasant surprise on the first of the month when it comes time to bind the policy. No one wants to make a call explaining that the rate will be higher to reflect a season’s worth of shifting costs.

Calculating replacement costs with monthly data means prices are more likely to reflect current market realities. While the numbers may still rise, the pace will likely be more gradual and could help prevent curveball cost changes that often lose deals.  

2. Building a more informed estimate of a business’s contents

Calculating a reliable replacement cost estimate for a business’s equipment, furniture, and supplies often comes down to guesswork today. Either the insured business owner, who is often too busy to have the time to inventory every item on the premises, or the agent, will provide a rough estimate of the contents that may be little more than a guess. Or, an insurer will rely on a percentage of the property’s value. Either strategy has the potential for overinsurance or underinsurance.

The risk of underinsuring contents, in particular, affects every business, including those that lease and may not be responsible for the primary property insurance policy. A bagel shop in a strip mall, for example, probably doesn’t own the building it occupies, but more than likely owns the fixtures, cooking equipment, and inventory.

While rebuilding an office building is generally more expensive than replacing its contents, claims for contents can arise more frequently and add up over time. And if a property experiences a total loss (from a fire, for instance), the resulting claim will very likely include the contents and structure. Errors in calculating the price of replacing equipment and inventory could leave an insurer with a larger-than-expected claim or an insured without funds to rebuild the business. 

A more refined metric, based not on best guesses but on computer models that generate an estimate derived from real-world claims involving similar businesses, can help better inform replacement cost estimates on business contents.

3. Develop a renewals strategy that reflects current market realities

Unless an insurer has recalculated a policy recently, chances are a fixed index may not be keeping up with current reconstruction costs, which have been rising dramatically since the pandemic began. Historically, in a less volatile climate, a percentage increase based on an index could more closely reflect market reality. But in today’s market for materials and labor, commercial lines insurers could end up collecting premium for a limit of insurance that may not necessarily match exposure if they use an index that employs a fixed percentage increase rather than recalculating the replacement cost using current pricing.  

Another critical problem with using an index during extreme price swings is that index values are generally composed of a “basket of goods” that are not specific to any commercial business. A basket of goods may include a material, such as lumber, that was not used in a structure’s construction. If the price of lumber skyrockets but steel for girders does not, then using a general index that relies on that basket of goods could lead to an inaccurate replacement cost estimate.

It is true that recalculating with component-based costs that are business-specific and reflect current market realities could lead to a change in the policy premium. While carriers can be reluctant to increase policy rates because they fear their customers will shop elsewhere, communication can help lessen defections. If a policy is priced 20 percent below the market cost for replacing the property in the event of a total loss, for example, then the insured may be self-insuring by default for that amount. And while a carrier may not want to ask for higher premiums, it’s even less desirable to face a series of claims that could leave policyholders vulnerable.

Educating customers by including detailed information about the evolving marketplace when sending out renewal notices can help satisfy customer concerns about changing premiums.

How Verisk can help

Insurers need reliable replacement cost estimates throughout the policy life cycle to maintain insurance-to-value (ITV). 360Value® for Commercial Property from Verisk can help. Getting the most reliable component-based estimate on the books from Day One helps support ITV, protecting both the policyholder and the insurer. Verisk, which is continually expanding its commercial property data, has increased the hit rate for getting 360Value prefill with just an address to about 75 percent. High-quality prefill for more properties can help streamline underwriting. Insurers can refine their quotes with a more precise calculation for the contents of a business with 360Value Commercial Contents, an innovative new tool that leverages advanced computer modeling of real-world claims. And once an insurer writes a policy with a reliable replacement cost estimate, recalculating with 360Value helps reduce the risk of underinsurance in a shifting market.

Check out our latest webinar to learn more about how 360Value for Commercial Property provides a robust reconstruction cost estimating solution that now includes an advanced method for refining contents estimates.

Joel Teemant

Joel Teemant is product director, 360Value commercial lines, for Verisk. He can be reached at

Visualize Subscribe

Get the best of Visualize!

Get the latest news and insights straight to your inbox.

Subscribe now

  1. Verisk data.

You will soon be redirected to the 3E website. If the page has not redirected, please visit the 3E site here. Please visit our newsroom to learn more about this agreement: Verisk Announces Sale of 3E Business to New Mountain Capital.