Using an inflation-based index to update reconstruction cost estimates (RCEs) might seem to be the simplest path for staying current with a homeowners portfolio. But when RCEs go on autopilot, critical factors may not be fully captured: weather events, wear and tear, and homeowners’ choices for maintenance, upkeep, and renovation. The resulting changes can affect a home’s insurance to value (ITV) calculation, potentially leading to premium leakage and unexpected outcomes when claims arise or customers renew their policies.

The pandemic may have amplified these issues in some portfolios. Maintenance volume and spending, respectively, were up 71.6 percent and 85.8 percent year over year in April 2021, making the ninth month of year-over-year growth and a drastic change from double-digit declines seen when the pandemic began, according to Verisk data. Meanwhile, remodel volume and spend—a subset of maintenance that includes renovations, additions, and alterations—increased 77.7 percent and 100.4 percent, respectively, year over year.[1]

Reconstruction costs also continued to rise as lumber prices reached new heights. Verisk data shows that lumber costs rose 84.7 percent from April 2020 to April 2021 as the market reflected ongoing high demand from increased building activity, supply shortages driven by pandemic-related shutdowns earlier in 2020, and reduced production.[2]

These changes are an urgent signal for insurers to pay close attention to both properties and policyholders in a homeowners renewal book, using the data to recalculate RCEs regularly:

Properties change. Significant renovations to a home occur every 2.8 years on average, and property owners spent $160 billion on maintenance and remodeling activity from January 2017 through July 2020, according to Verisk data. Activity fell sharply early in the pandemic but then accelerated. Improvements such as pools surged in popularity, spiking nearly 42 percent between July and August 2020, and bringing increased liability risk as homeowners looked more to domestic spaces for recreation and relaxation.

Higher-end homes may not correlate with index-based valuations. About three-quarters of premium and custom homes calculate higher using an ITV tool compared with an index, according to a Verisk study of RCEs. Average estimates using 360Value^® were 5 percent higher for premium homes and 4 percent higher for custom homes.

Certain features can skew RCEs away from indexed valuations, including wood shake roof coverings, concrete block construction, plaster walls, metal roofs, and 100 percent stucco exteriors. Therefore, recalculating regularly with an RCE tool such as can be critical to help both maintain ITV and keep the renewal book healthy.

Customer defections can follow life events, especially a move that leads to shopping for new coverage. Foreclosures can also point to properties that may need to be checked for deferred or subpar maintenance. Actionable homeowner event data can show when it’s time to check for these hidden risks.

Tools and data that catalog key property characteristics, flag changes, and provide alerts to life events can help target the properties and customers most in need of recalculation, underwriting action, or outreach to address potential premium leakage. A range of solutions can broaden the view of risk and help fill gaps in understanding that affect valuations.

Renewal books of business present untapped potential for insurers to improve their bottom line often without affecting their competitive position for new business. In light of the post-pandemic new normal—and as a best practice under any circumstances—a portfolio review may be in order to prepare for what may come next.

For more insights on homeowners renewal strategies, download Verisk’s white paper, Focus on Portfolio Profitability and Insurance to Value.

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By: Trish Hopkinson, Product Director, 360Value Personal Lines, Verisk

Trish is product director for 360Value for personal lines. Trish brings 15 years of 360Value experience to manage the continuous development of both SmartSource and 360Value and works with clients to incorporate their needs and feedback into modernized and streamlined workflows. Prior to her current role, Trish worked at Verisk in client services, quality assurance, and project management.

By: Barbara Cheatham, Senior Director of BuildFax products at ISO.

Barbara Cheatham is senior director of BuildFax solutions at ISO. Her primary responsibilities include leading the strategy and development of property intelligence solutions across various business lines. Prior to BuildFax, Barbara held leadership roles spanning product management and development, systems integration consulting, and project management.

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[1] Verisk, BuildFax Housing Health Report, April 2021.
[2] Verisk, 360Value^® Quarterly Cost Update, Q2 2021, United States.