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Kroll's Flemming: Three out of Four Properties May Be Underinsured

As construction costs continue to rise, as many as 75% of properties may be underinsured, said Lori Flemming, managing director of fixed asset advisory services for Kroll.

Could you tell us how the hard market is impacting underwriting today?

The property market is cyclical, right? So definitely in a hard property market have been probably since 2019. The storms of 2017 started this whole chaos that we're in, actually. So the underwriting community has gotten more disciplined certainly about which risks they're going to accept. And of those during the submission process, there's much more scrutiny about the data — the COPE [Construction Occupancy Protection Exposure]

data, the primary COPE and secondary COPE data — and values as they're going through the submission process.

Underwriters are no longer turning a blind eye to poor data, or to clients who are not adhering to loss engineering suggestions. So they're either passing on submissions in many cases, or putting in your terms and conditions in the policies that can be somewhat onerous for the clients. It certainly changed the whole underwriting world. A number of providers have exited the market. So capacity is lower. And it hits hard the property market. Capacity’s lower, fewer people in the markets, and prices of rates and premiums have gone up, up, up.

With so many properties increasing significantly in value, what percentage of properties are underinsured today?

I would say that with the cost of construction that's gone up, labor and material rates have just gone through the roof. Unfortunately, we're seeing that most of the clients who come to us with a valuation need are woefully underinsured. I'm thinking probably 75% or more. If you're not keeping up annually, with the cost trends and the changes that are occurring, it's just very difficult to keep track of good accurate values. So unfortunately, many are still woefully underinsured.

And what should insureds be doing to try to mitigate that?

They're getting lots of input now from boards of directors, shareholders, upper management that risk managers never really had to deal with before. But now, there's the loss history, the claims history has escalated to the point that the risk managers are getting much more scrutiny. So they're being forced to hire outside firms, third-party resources to help them get a handle on their data and their values.

It's just no longer acceptable just to provide values to underwriters, the underwriters are demanding that they get support behind the declared values one way or the other. You throw in a very acquisitive company that's buying properties and buying businesses — an accounting value, a fair market value, has nothing to do with an insurable value. They can't just take an accounting number, or finance number, they really have to take that extra step and understand what a replacement cost would be, or an actual cash value or historic reproduction cost for cathedrals and those properties that are on the national registry. So really being forced to use outside firms to help them get a handle on their declared values.

Who is ultimately responsible for property not being insured to value?

The insured, the end client is absolutely responsible. It's stated in the policy and the underwriters do their due diligence, they do everything that they can, but ultimately, if it comes down to an actual loss, and there was an undervalued situation, someone's going to have to explain to their upper management or to their board as to why we were so off on those numbers.