Hurricane season emphasizes the importance of accurate total insured values, but if you're using traditional valuation approaches, the pressure to modernize is far from seasonal.
Hurricane season may prompt your organization to prioritize mitigating the potential impacts and reviewing total insured values, ensuring asset valuations are current and precise.
During hurricane season, the risks to assets escalate dramatically. If a hurricane affects your organization's assets and there's a discrepancy between actual and reported values, the business could face significant financial strain due to uninsured losses.
Over-valuing assets is equally problematic wasting capital on unnecessarily high premiums, draining resources the business could better spend elsewhere. In our experience, overinsurance has led some businesses to spend millions of dollars they could have diverted to activities more likely to deliver return on investment.
Regardless of extreme weather events, if you aren't doing so already, risk managers need to be ready to take a more proactive, more precise approach to valuations. If you don't modernize your valuations approach, you could be facing finance leaders who sooner or later will want to know either why the business is exposed to uninsured losses, or why you're leaving money on the table at renewal because of over-reported values.
This insight, which draws on our Outsmarting Uncertainty webinar series, sets out the motivation, means and methods to get on the front foot when it comes to valuations. We look at accurate valuations both in the context of hurricane season and into your next renewal period.
Steps to enhance preparedness for hurricane season
There are three critical steps your organization should take to enhance its response to this year's hurricane season and prepare for the next:
- Review your disaster recovery plans. These are crucial as they outline the procedures to follow in the event of a hurricane, which ensure critical business functions can continue with minimal disruption. You should assess these plans for comprehensiveness and relevance to your current business operations. Disaster recovery plans should include detailed strategies for data backup, resource allocation and communication during and after a hurricane. A robust disaster recovery plan allows you to both maintain essential services and ensure that colleagues know their roles during a crisis. You should also regularly test and update these plans to make sure you're adapting to any new business changes or external factors that could influence the effectiveness of your procedures.
- Ensure your business continuity plans (BCPs) are fit-for purpose. Your BCPs should be robust enough to handle the specific challenges posed by hurricanes so all elements of operations can continue. Evaluate your current operational vulnerabilities. If your business relies heavily on physical infrastructure, for example, you'll need a clear plan for quickly restoring damaged facilities and equipment. Think about employee safety, temporary relocation plans and remote work capabilities. Integrating learnings from past incidents and simulations ensures your plans aren't only theoretical but practical and effective under real-world conditions.
- Check the terms and conditions of your insurance policy. Which aspects of hurricane damage does your policy cover and to what extent, including any deductibles and exclusions that may apply? This is where inaccurate valuations can lead to significant uninsured losses. We've seen multiple cases where businesses have faced extensive damages that exceeded their policy limits. Insurance policies can also have significant variations, such as specific limits on claims for certain types of damage or additional coverage options you'll need to activate before you can use them. For example, some policies may cover the cost of business interruptions or the expenses related to evacuating and protecting employees, others won't.
Why review your approach to quantifying total insured values
The traditional methods of asset valuation, which often involve applying a standard inflation rate to previous valuations year-over-year, are no longer enough. This outdated approach can lead to significant discrepancies in insured values, resulting in severe financial consequences during times of loss.
Since 2020, the global economy has experienced unprecedented volatility driven by events such as the COVID-19 pandemic, supply chain disruptions and geopolitical tensions, including the Russia/Ukraine and Israeli conflicts. These events have led to significant fluctuations in the prices of labor and materials, impacting the value of assets.
Traditional valuation methods don't account for these rapid changes, which is what's driving too many valuations that are either too high or too low. This really matters because insurers are increasingly linking post-loss recoveries to the reported values at the time of policy renewal. If your values aren't accurate, you may struggle to claim the full extent of your losses.
Modern valuation methods can provide more precise data, ensuring you comply with insurance requirements, reducing the risk of disputes or underpayment on claims. We'll look at this in more detail, but first consider other means of making sure you get your total insured valuations right.
Prioritizing on-site evaluations and integrating business continuity plans
On-site evaluations are critical for obtaining the most accurate valuations of your assets. These allow for the data you provide to be verified and for the collection of additional details that might be missed otherwise. For buildings, an on-site inspection can confirm gross square footage and key features that affect value. For equipment, it ensures all assets, even those not listed on the fixed asset register, are accounted for. This hands-on approach provides the highest level of confidence in the resulting valuations.
The business interruption (BI) worksheet is a common tool used to estimate business interruption values. However, it may not be detailed enough to capture all relevant revenue and expenses and we've sometimes seen misinterpretation of the terminology used on BI worksheets.
To overcome these challenges, your BI analysis should integrate business continuity plans, disaster recovery strategies and an understanding of your organizational interdependencies. A more comprehensive approach ensures the BI values you calculate are a true reflection of your potential loss exposure.
How modern valuation approaches can help you and your organization
The traditional methods of valuing assets often don't suffice in today's dynamic market conditions. You need to move away from 'the way it's always been done,' particularly if this approach was to simply adjust past valuations by an annual inflation rate. This won't account for changes in market conditions, the cost of materials and other relevant factors.
On-site appraisals supported by digital tools can help verify the physical condition and actual specifications of assets more accurately. You can also deploy software providing benchmarking data and high-level assessments to validate and adjust valuations based on broader market trends.
Scenario-based planning can also play a crucial role in accurate asset valuation. By considering various potential future states, you can better understand the range of possible outcomes and prepare for them. This approach is particularly important in the context of business interruption, where understanding the impact of different scenarios on your operations can help you quantify potential losses more accurately.
Modern valuation techniques reflect current realities. They're about incorporating real-time data and sophisticated modeling techniques to reflect dynamic conditions accurately. With the auditability and credibility of robust modeling, you can be confident in providing business leaders with the reliable data they to make the right strategic calls on risk retention and insurance purchasing. And when you can help leadership allocate capital more effectively, you'll enhance your credibility.
Limitations and opportunities of applying analytical methods and modeling
While analytical methods and modeling offer significant advantages for accurate valuations, they also come with limitations. The quality of the output is heavily dependent on the quality of the input data. Ensuring the data you feed into these models is accurate and robust is all part of taking a proactive approach to risk management. However, the opportunities provided by modern valuation methods remain substantial, giving the business a far more nuanced understanding of asset values and identifying risks that might not otherwise be apparent.
By leading the charge in adopting these advanced techniques, you not only ensure more accurate valuations but also establish your role in your organization as a leader in proactive, strategic risk management.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.