The Importance of Verifying Replacement Cost Data in Commercial Real Estate
All commercial real estate risk managers know that it is imperative to adjust the replacement cost values they report to their carriers to account for increased rebuilding costs due to inflation and other factors. In recent years, this has become even more critical due to the recent economic and social inflation period, which has increased the price of construction supplies substantially, resulting in higher costs to rebuild. Between 2018 and 2022, insurance replacement costs increased by 20.7%, according to data from the Insurance Information Institute.
In the past, these increases have gone up gradually — between 3% one year or 4% the next. Rarely has it increased by as much as 5%. Risk teams could adjust their values by a set percentage each year and not worry about having enough coverage.
That all changed in 2020. Pandemic-related supply chain and economic issues drove inflation rates to a 40-year high, increasing the price of everything from gas and groceries to critical building supplies. Since replacement costs are now much higher than they used to be, risk teams need to consult data from contractors and claims adjusters to ensure they have adequate coverage for their property to rebuild if needed.
Verifying replacement cost data can help commercial real estate risk managers understand the effects of inflation on their property portfolio and can help risk managers prepare for renewal negotiations with their carriers. Right now, risk managers need to find an insurance sweet spot — they don’t want to pay too much for coverage (as this can prove to be costly), but they also don’t want to purchase too little. They need to get it just right.
Inflation Constantly Changes the Costs of Materials
One major reason replacement costs have increased so dramatically over the past few years is inflation. Though the rate of inflation has decreased somewhat in recent months, many contractors are still struggling with the costs of lumber, paint, and other materials.
Per data from the Producer Price Index, the price of steel mill products increased a whopping 127.2% between December 2020 and December 2021. Lumber and plywood prices increased by 17.6%, concrete by 8.5%, and aluminum by 29.8%.
Builders haven’t operated in an environment where inflation has been this high in a long time. For the past 32 years, inflation hasn’t increased the cost of critical construction supplies by more than 5%, according to the construction financial management association.
Replacement costs are fluctuating in tandem with inflation and are changing rapidly. In the past, risk managers may have adjusted the valuation of their property portfolio by a set percentage each year to account for increased rebuilding costs, but that is no longer adequate. Now, they need to consult accurate, real-time replacement cost data ahead of their insurance renewals.
Real-time data from contractors, claims adjusters, and materials cost surveys can give risk managers a better sense of what their property’s true replacement costs are and how they’ve been affected by today’s inflationary environment. This data can help risk professionals determine if they’ve purchased high enough limits for the properties in their portfolio.
LineSlip’s True Replacement Cost feature pulls data from contractors and claims adjusters, so risk managers can be sure they have the most accurate information for today’s inflationary environment. Using real-time data, risk professionals can track how rebuilding costs are shifting, enabling them to make the most informed decisions.
Verified Replacement Cost Data Can Help in Carrier Negotiations
Carriers are not ignorant of the effect inflation has had on replacement costs. Over the last few years, claims costs have skyrocketed, and coverage gaps have caused carriers to increase rates and impose penalties like coinsurance clauses on their policies. Commercial property premiums increased by 20.4% in the first quarter of 2023, according to The Council of Insurance Agents & Brokers’ Quarterly P/C Market Survey.
With rates climbing higher and higher, risk teams are looking for any tool that can give them an edge during renewal negotiations. Bringing accurate replacement cost data to the table can help risk managers show their carriers that they know how much it costs to rebuild and that they’re purchasing adequate limits. That way, they have more leverage when it comes to negotiating premium prices and coverage terms.
In addition to helping with rate negotiations, insureds can use accurate replacement cost data to argue against penalties like coinsurance or margin clauses that carriers add to their policies. These types of penalties increase the amount of rebuilding costs an insured is liable for should a property value be underreported. Risk managers who present accurate, verifiable data to their carriers can demonstrate that they’re on top of how inflation is affecting their replacement costs and, therefore, don’t need these clauses on their policies.
Rest Easy Knowing Your Property Isn’t Underinsured
The last thing risk professionals want to deal with after a natural disaster damages a building is worry about coverage gaps. They’ll be busy coordinating with contractors and claims adjusters; they don’t want to be forced to go to senior leadership and ask if the company can find money in the budget to pay for needed repairs that everyone thought were already covered through their insurance.
Armed with accurate replacement costs, risk professionals can feel confident that they have enough coverage to avoid this nightmare scenario. Additionally, they can feel confident that they can negotiate with their carrier for a fair premium, assuring that they don’t pay too much for their insurance policies or have to contend with penalties like coinsurance clauses.
LineSlip’s True Replacement Cost
With materials costs constantly in flux due to the effects of inflation, risk managers need accurate, up-to-the-minute replacement cost data to ensure they have the right amount of insurance coverage needed for their property portfolios.
The True Replacement Cost feature from LineSlip provides risk professionals with a database of rebuilding costs pulled from tens of thousands of contractors and claims adjusters, in addition to information from material and labor cost surveys. The feature also analyzes millions of damage repair estimates, so insureds can feel confident they're getting accurate, real-time replacement cost updates.
With this tool, they can verify how much it would cost to rebuild their properties in today’s economic environment and negotiate with carriers to ensure they have just the right amount of coverage.
