Regular Insurance Valuations - Why?
Let's now examine each in more detail.
Management is responsible for ensuring that a company's assets are properly utilised and protected. Insurance addresses the issue of protection, however, if the sums insured do not properly reflect the possible risk then management is either wasting money on excess premiums (in the case of over-insuring) or taking unnecessary risk (in the case of under-insuring). Most, if not all, policies contain a co-insurance clause (also known as the "Condition of Average Clause") which comes into effect when a loss occurs and it is determined that the Sum Insured is less than the true value ("Value at Risk"). The co-insurance clause basically means that if the assets are under-insured, the company is opting to carry the risk for the difference between the Value at Risk and the Sum Insured. In essence this means that the amount paid by an insurer in the event of a loss equals the actual loss multiplied by the ratio of the Sum Insured divided by the Value at Risk. A simplified example follows:
Sum Insured: US$8 million
Value at Risk: US$10 million
Therefore the company is co-insuring the difference of US$2 million.
If a loss occurs which costs US$5 million to rectify, the insurance company will only pay US$4 million and the company will have to pay the remaining US$1 million (US$8m / US$10m = 80%, US$5m * 80% = US$4m). On the other side of the coin, over-insuring is purely a waste of money. Insurance companies will never pay out more than assets are worth regardless of the how much cover you have. In other words, if you insure for 20% more than your assets are worth, the insurance company will only pay out up to the actual value of the assets, the remaining cover is redundant and the premiums on this cover could have been saved.
As for how insurance valuations can assist in the settlement of a claim, simply having had a valuation done can help reduce settlement time as the insurers are less likely to suspect under-insurance and test for this in order to apply the coinsurance clause. The information gathered in the valuation process – photographs, drawings, specific machine information, etc – can also help determine exactly what was on site and provide corroborating evidence in proving the claim. The valuers can also be brought in to work with the loss adjusters and assist them in determining the current value of the loss.
Regular insurance valuations are cost effective – once a valuation program has been put in place, it can help ensure that you are managing your insurance costs and cover effectively and provide support for claims. One important aspect of an insurance valuation program is determining what to value and how frequently, this is something that your valuers can help you decide and will depend on the nature of your business – how quickly costs change, how many similar locations you might operate from, whether there are long term economic factors which impact on asset utilisation, etc. While many insurance programs are similar, no two are the same – make sure your valuers are properly tailoring their services to your specific needs.