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December 14, 2022

Get ahead of increased construction costs and supply chain challenges

Part three of the three-part inflation blog series

As construction costs and supply chain challenges continue to impact the value of property assets such as buildings, equipment, and their contents, organizations should assess the adequacy of their insurance coverage to make adjustments that will help them recover following a catastrophic event.

Key actions to improve property valuation

Businesses should increase limits in their property and business interruption programs to account for the impacts of inflation. This includes adjustments to asset valuation and indemnity periods to enable time to recover more fully, as well as modifications to inflation-related clauses in insurance policies.

The implications of inflation vary by industry, geography, and even by the unique business itself. Businesses and their brokers should work closely to gain the right balance of suitably broad coverage while keeping premium increases within reason during these turbulent times.

Insurers rely on the accurate reporting of replacement values to determine premiums, decide how to deploy their capacity, and in some instances, purchase facultative reinsurance. Insurers expect insureds to report accurate replacement values in line with valuation conditions established at the start of the policy term. As construction prices remain high, and supply chain challenges lead to longer timelines and delays, it is wise to consider these actions ahead of your next renewal:

Start the process early

Insurers typically require updated values for insured locations to be submitted 60 to 90 days prior to the renewal date. Considering the increases in construction costs, make sure to allow enough time to carry out an in-depth valuation of insured properties that can be shared with underwriters. This can be carried out early during the expiring policy period and adjusted before renewal. In situations where the schedule of values consists of many locations, insurers may be willing to work with insureds and agree to a plan to review the valuations over the next few renewal cycles.

Carry out a benchmarking exercise

Benchmarking estimates use limited data points to provide rough preliminary guidance around values, serving as an important first step in your property valuation exercise. While benchmarking exercises are only the starting point for reviews and discussions, they can also provide an estimate of property values until a detailed valuation can be carried out.

Plan the valuation process

Reviews of property values and valuation of your buildings and contents for large projects can take several months. “Timing your request early enough should especially be taken into consideration due to significant demand for valuation assistance at a time when specialists may still face pandemic-related travel restrictions,” says Tim Ramsayer, Valuations Practice Leader, Property Consulting, Marsh. Next, identify an external team of specialists that will work on the valuation process; your broker or insurance advisor may be able to assist. Finally, you should collect all the necessary underwriting data, including statements of value, property condition assessments, site surveys, scaled drawings, and prior property valuations.

Consider your downtime

Supply chain challenges coupled with a shortage of skilled labor may lead to longer timelines, which could take significantly longer to replace or repair damaged equipment. Work with your appraisers to determine how these longer timelines will affect your organization’s output when calculating business interruption figures.

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We recommend that you update the declared values of your assets and exposures to account for increases caused by inflation. Review your policies today with a Marsh McLennan Agency representative to help you better prepare your business for the future. 

To read more about how inflation can effect your business insurance, read parts one and two of this series.