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

Rising property changes drive higher replacement costs

Verisk 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. Insurers need reliable, up-to-date estimates to update building costs at renewal to maintain ITV and ensure adequate protection.

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

View our latest webinar for more on the market conditions impacting ITV for property insurers.

Trish Hopkinson is Head of 360Value, for Verisk.

Barbara Gipson is senior director of personal property product management at Verisk.