Benefits of an Insurance Appraisal and Loss Control Reporting in a Hard Market

The insurance industry is well known for its cyclical nature of “soft” and “hard” markets. Anyone in the industry, including brokers and insurers are very familiar with the “soft” and “hard” market terminology and the very different business environments they create. They experience “firsthand” the daily impact of these market cycles on all their lines of business and service offerings. In contrast, few people outside the industry are familiar with these terms, although most individuals as well as commercial and public entities are long-time consumers of many insurance services and are financially impacted by these insurance market cycles. It is therefore important to have a clear understanding of these concepts and how it impacts individuals or business entities, so they can better navigate through the challenging times of a “hard market”, minimizing its financial impact.

Soft Market versus Hard Market

Insurance markets are impacted by national and international financial conditions, and other global events. These include the general state of the economy, interest rates, stock market performance, natural catastrophic events, conflicts between countries, terrorists’ events, evolving cyber risks, and claim activity resulting from these events.

More precisely, a “soft market” is usually a result of:

• Stable, positive economic conditions;
• High interest rates;
• Less property claims activity;
• Insurers having the adequate capital to insure.

Stable economic conditions, translates into more potential clients for insurers, since most businesses, and individuals are doing well and have the financial ability to pay for appropriate insurance coverages. When interest rates are high, the insurers’ investments are also doing well. Lastly, if claim activity is as expected or lower, and the average claim costs are lower, this also has a positive impact on their financial position. Simply put, the culmination of these factors, results in insurers being well capitalized, giving them the capacity to underwrite a larger amount of insurance throughout most of their business lines. This also means there is greater competition among insurers for business, translating into lower premiums rates and more favourable terms for the insureds.

In contrast, a “hard market” is typically a result of:

• Unstable economic conditions;
• Low interest rates;
• Catastrophic events and high property claims;
• Negative global events (i.e., climate change, pandemics, trade wars, civil unrest, etc.).

During poor economic times, businesses and individuals are not doing as well, diminishing their ability to pay for various insurance coverages. Lower interest rates also mean insurers are making less money on investments. This unfavourable financial performance is compounded if they are experiencing high property claims, especially if the average claim amounts are larger than expected. These negative factors result in the insurers having a lower capacity to underwrite insurance in most of their business lines. Since they do not want to take on any high-risk coverages during these times, they become very selective on what risks they insure, charge higher rates, and impose much stricter terms and reduced coverages. They are also much less inclined to negotiate the terms of the policy.

The Current Hard Market and How We Got Here

The state of the insurance market had been “soft” for 15 years, until Q3 of 2020. We then had a convergence of events and factors that rapidly changed the landscape of the insurance market. There has been an increase in the severity of losses, further evidence of accelerated climate change and the impact of Covid on the global economy. Because of these events and the resulting costly claims, we are now well entrenched in a “hard insurance” market, with insurers having little appetite to take on risky policies. North American commercial insurance prices are experiencing significant premium increases for most lines of business.

What Can Businesses do to Mitigate the Impact of a Hard Insurance Market

There are several things that businesses can do to lessen the financial impact of placing insurance, in a hard market:

1. Review your Policy

Consult with your broker(s) to review and understand coverages. Property inclusions and exclusions should be carefully considered, along with the premises of the insured values. Redundancies should be eliminated, and any inadvertent property omissions added to the policy.

2. Implement Best Risk Management Practices

Implementation of a comprehensive risk management policy is a prudent step in decreasing the chance of a loss. This will also put a business or public entity in a much better position to be viewed as a “better risk” by insurers, making it easier to place a policy at better premium rates and more flexible terms. Two components of a sound risk management strategy include having your property appraised by a qualified appraiser and developing and implementing a loss control program that can include risk inspections with recommendations and follow-up (to ensure recommendations are being executed).

3. Assist your Broker(s) in Making a Better Submission

Currently, insurers are being inundated with submissions from potential clients having a difficult time placing a policy. Naturally, underwriters will select submissions that have the most complete information and tell a positive story about the client seeking coverages. It is important these submissions from the brokers highlight the risk-mitigating practices that have been adopted by their client and the positive loss history that has ensued. A current insurance appraisal and loss control report will significantly augment the submission and assist in differentiating the client from others in their industry.

4. Practice More Frequent and Better Communication with your Broker

The renewal frequency may be annual; however, property and economic changes are always ongoing. So, it is useful to have periodic communication with your broker(s), especially when circumstances have significantly changed since the renewal date. These changes need to be communicated so the broker(s) and insurers have up to date information. For clients that had insurance appraisals completed, property changes are best captured in an insurance appraisal update, that can be provided to your brokers.

Why are Insurance Appraisals and Loss Control Reporting of Property Viewed so Favourably by Underwriters?

We have discussed the importance of providing brokers and insurers current insurance appraisals and loss control reports. Why are these reports (appraisal and loss control) viewed as a very important part of the submission? As a background, post-loss analysis of recent years indicates that over 60% of commercial businesses’ property are under-insured. An accurate insurance appraisal and loss control reporting completed by qualified/experienced personnel, will eliminate this risk of under-insurance, and assist to mitigate a loss before it happens. To understand the benefits to insurers, it is helpful to look at the appraisal and loss control process and the information provided within the reports. As part of the appraisal process, the property is inspected, photos are taken, and principal assets are detailed in the appraisal report, providing underwriters granular documentation of the insured property.  For loss control reporting, the property is also inspected for hazards and risks that pose potential losses. Once these are identified, recommendations are made to reduce the risks, keeping with applicable standards (ex. National Fire Protection Association. This level of detail is very helpful in quantifying not only a total loss, but also a partial loss.  Combining appraisal and loss control service such as Construction, Occupancy, Property Exposure (COPE) reporting can be very useful to brokers and insurers for insurance placement, however, can also be very beneficial in the unfortunate scenario of a loss.

Finding the Right Firm for your Insurance Appraisal and Loss Control Needs

As a commercial business or a public entity in this “hard market” you should discuss with your broker(s) and jointly decide whether a current insurance appraisal and or loss control reporting for your property will be useful to assist with placement of the policy with potential underwriters. If you decide to proceed with these services, how do you go about selecting a service provider that is best for your needs? Many initial considerations must be made, including the type of property to be insured and the skill sets that will be required. Specific industries such as power generation, forestry, mining, high-tech manufacturing, metal working facilities, food, and beverages, require intimate knowledge of the assets of these industries to complete an accurate appraisal and/or perform loss control inspection and reporting.

A good place to start your service provider selection process is to consult with your broker. Since they have many clients, it is likely they are very familiar with appraisal and loss control firms that perform services similar to your requirements. Secondly, contacts in companies that are engaged in similar services to your business may be able to provide referrals to reputable appraisal and loss control firms. Once you identify the firm(s) that may be able to assist, you should make the following assessment:

1. Does the firm have a good market reputation? Can they provide a list of previous clients served in your industry, including recent references?
2. Does the firm carry Errors and Omissions insurance for the clients’ additional protection?
3. Does the firm have appropriate credentials in cost estimating and/or loss control, providing assurance of the technical knowledge required to complete the service accurately. For example, relevant accreditations include Accredited Senior Appraiser (“ASA”) designation from the American Society of Appraisers; Accredited Appraiser Canadian institute (“AACI”) from the Appraisal Institute of Canada; Canadian Certified Playground Inspector (“CCPI”) from the Canadian Playground Safety Institute; Associate in Risk Management (“ARM”) from the Risk Management Society.
4. Who would be the personnel assigned to the project? Do they have the relevant educational background and technical skill sets in appraising or completing loss control inspections for the buildings and machinery and equipment?
5. Will the appraisal include a site inspection, and documentation of the insurable assets to enable a current cost estimate, versus relying on indexing of historical costs from property records?
6. Will the loss control report include a site inspection, documentation of observed risks and hazards with appropriate recommendations to mitigate loss?
7. What type of report(s) will be provided? (It is not unreasonable to request a sample report of the deliverables and share it with your broker to ensure it meets their requirements).

Conclusion

Insurance appraisals and loss control reporting are always a key component of an entity’s risk management strategy. This is especially so in this current hard market, as insurers are much more selective as to which properties they underwrite. Further, with the current higher insurance rates, reporting of overstated values will translate into even larger premium overpayments. An accurate insurance appraisal and loss control report completed by an accredited, experienced, reputable firm, is your best option to assist with placement of insurance in this hard market.

For Assistance in this Hard Market, Call Suncorp Today.

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What Factors Have Been Influencing Canadian Construction Costs in 2020 and 2021?

Many factors influence building costs.  These factors fall under the general categories of material costs, services costs, and labour costs.

Looking at material costs, there are many sub-categories such as framing lumber, concrete, steel, gyproc, insulation, etc.  Each of these sub-categories are impacted by supply and demand forces in their particular market which ultimately influences the cost for that item.

Looking at framing lumber, these costs have risen significantly during the past year mainly due to a rapid rise in housing starts.  On the other hand, labour costs have flattened or in some cases fallen with some sub-trades and in some regions during the past year due to mass layoffs and high unemployment caused by the COVID pandemic.

Although there are innumerable factors that influence building costs, during the last ten years the overall trend has been inflationary.

During the first year of the pandemic, there has been a great deal of volatility, but the overall trend has been inflationary as well.

According to Stats Canada, Canadian residential construction costs increased by 12% between Q1 2020 and Q1 2021.

We have observed in some cases that although building material costs have recently risen significantly, some developers are decreasing profit margins or taking some other steps to lessen the inflationary impact.

As an example, statistical data indicates that overall building costs in the Vancouver region rose 3.7% from Q4-2019 to Q4-2020, and that during the same period the cost of single family housing rose 6.6%.

What is the current outlook for building cost trends for 2021 and 2022?

This short-term rate of building cost inflation is unsustainable.  Therefore, at some point in 2021 or 2022 the pace of increase should slow to levels that are more traditional.  There may even be a period of deflation to some degree as the markets re-adjust.  However, with so many different factors at play it is impossible to predict the nature and timing of this change in trends.

How does this affect Insurance Appraisals?

During normal business cycles, Suncorp’s professional staff monitor a wide variety of data sources to support building cost estimates for a wide variety of building types, and in a wide variety of locations.  This includes analysis of statistical data from Stats Canada, RS Means, Marshall & Swift, and many other reliable sources.  We also collect and analyze market data in the form of actual costs from current construction projects.

During times of economic instability, such as the COVID pandemic, market forces become volatile.  This volatility affects the many factors that influence building costs.  As such, it becomes challenging to accurately estimate building costs during these periods.  For example, statistical reports often have a 3-6 month lag time.  Accordingly, the recommendation by many brokers is to have a professional appraisal done at regular intervals so long term market factors such as economic and even monetary factors (exchange rates) are considered to arrive at an accurate value.

Technical Reviews

Have you ever considered getting a second opinion on an appraisal, cost estimate report, reserve fund study / depreciation report, or consulting report? Here is an option, the Technical Review. You can even get a Technical Review of a Technical Review.

What is a Technical Review?

A Technical Review is an unbiased and objective formal written critique of a report that was prepared by another firm.

The purpose of a Technical Review is to form an opinion on if a subject report is credible and reliable.  The opinion is supported in the Technical Review report by detailed analysis of any errors or deficiencies observed in the subject report.

Technical Reviews are prepared by Suncorp’s Senior Consultants whom have completed additional training and have experience in this specialization.  Technical Reviews prepared by Suncorp are prepared in alignment with the Review Standards of either the Uniform Standards of Professional Appraisal Practice (USPAP), or the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP).

What are Technical Reviews used for?

Technical Reviews are most often prepared for different types of litigation support, and at various stages including pre-claim analysis, or to assist with preparation for cross examination.

Technical Reviews are also often commissioned as part of a due diligence process.  For example, a private equity lender may require a Technical Review of an appraisal report to help determine the credibility and reliability of an appraisal submitted as part of a mortgage application.

Scope of a Technical Review

The scope of a Technical Review has a very wide range, from a basic standards compliancy up to a full audit of work-files.

All Technical Reviews include a standards compliancy review against the set of standards under which the subject report was prepared, which could be either USPAP, CUSPAP, RICS Red Book, International Valuation Standards, etc.  This stage also includes a review of methodology employed within the subject report.

Technical Reviews may also include additional steps depending on our clients need.  These can include verification of factual data reported within the Subject Report, re-inspection of the subject property, additional market research, or even a full audit of the entire process and work-file.  Often our clients may have specific questions or issues they may want us to investigate.

It is important to note that a Technical Review does not provide an alternate opinion.  For example if the subject report is an appraisal report, the Technical Review does not include an alternate opinion of value.  However if the client also needs that alternate opinion of value, Suncorp is available to provide that service under separate cover.

Geographical Considerations

Depending on the scope, Technical Reviews may be conducted on reports developed on properties located virtually anywhere.

For example if the subject report is a Reserve Fund Study on a property located in, say Texas, and the scope of review is limited to a standards and methodology review, then the location of Suncorp’s reviewer is not an issue.

Suncorp’s Technical Reviews Services

Suncorp Valuations can provide Technical Review services on a wide variety of report types including Real Property Appraisals, Machinery & Equipment Appraisals, Insurance Appraisals, Reserve Fund Studies and Depreciation Reports, and related Consulting Reports.

For a Second Opinion, Call Suncorp Today.

CONTACT US

Inspection Tip: Playground Inspections in the Spring

Learning Objective: To discuss the recommended inspection practices for Playgrounds after winter conditions.

For additional information, contact:

Doug Taylor, CRM, CCPI
Managing Director, Risk Management Group
doug.taylor@suncorpvaluations.com

Economic Impairment in the COVID Era – Some Quick Considerations

Recently, we have been conferring with many clients and their accounting counsel on the potential for economic impairment and subsequent potential for write-downs as they wrestle with the day-to-day impacts of COVID-19. This is relevant to financial statements for the periods ending after December 31, 2019.

The implications for financial statements include not only the measurement of assets and liabilities but also disclosure and possibly an entity’s ability to continue as a going concern. The implications, including the indirect effects from lower economic activity, should be considered by all entities, not just those in the territories most significantly affected. (1)

Here are some bullet points to consider:

1. Asset write-downs and impairments are a big focus. Impairments really put pressure on companies’ balance sheets. They occur in an environment in which the company is distressed, assets are being written down, and at a time when companies really need capital to sustain their operations. (2)
2. Whether you are operating under International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP), the relevant accounting associations are providing guidance that businesses should examine.

The Chartered Professional Accountants Canada has provided a valuable alert relative to Accounting Standards for Private Enterprises (ASPE), see https://www.iasplus.com/en-ca/publications/cpa-canada/assessing-potential-covid-19-impacts-on-financial-statements-questions-to-ask-under-aspe/at_download/file/02449-RG-ASPE-Alert-Assessing-COVID-19-Impact-Questions-June-2020.pdf.

The ASPE bulletin provides guidance relative to Property, Plant and Equipment.

Impairment of Assets Other than Financial Instruments

The financial performance of entities may be significantly affected by COVID-19 and related government measures. This may raise impairment concerns for various assets held by an entity including property, plant and equipment, intangible assets, goodwill, investments in other entities, inventories and other assets.

These assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. COVID-19 may raise questions, such as:

• Are some items of property, plant or equipment no longer in use due to COVID-19?
• Have certain operations of the business closed down, either temporarily or permanently?
• Is the useful life of any asset likely to be shortened as a result of COVID-19?

The above are examples of indicators of impairment and are not meant to be an exhaustive list. Advice from qualified professionals is essential in assessing the expected significance and duration of COVID-19 impacts and related government measures on the business unit, and when evaluating how quickly that business unit is expected to recover. A short-term reduction in cash flows followed by a rapid return might not be significant enough to be considered an indicator of impairment for some entities. For others, even a relatively short disruption due to COVID-19 may affect recoverability of carrying amounts of certain assets. An impairment loss might not be reversed if the fair value of the asset or group of assets subsequently increases in a future period. (3)

1. Under GAAP there is the use of a “triggering event” for restatement purposes. From a financial reporting perspective, the fair value of assets could come under pressure as the economic impact becomes more visible.  Impairment testing is required whether in the case of a “triggering event”, as defined in ASC 350 – Intangibles –Goodwill and Other, and in ASC 360 – Plant, Property and Equipment.  Triggering event-based impairment testing is an issue even for those who have made accounting elections whereby assets are being amortized rather than tested annually for impairment. (4)

As professional appraisers we are being asked to assist in the quantification of impairment for facilities all over the world. The American Society of Appraisers has offered previous guidance to allocating impairment losses to the value of assets.

If value in use for a single cash generating unit (CGU) is less than the sum of  Depreciated Replacement Cost (based on physical and functional depreciation) of the assets comprising the CGU and the difference is recognized as asset impairment (economic obsolescence), the question then arises as to how to allocate these impairment losses among the assets comprising the CGU. IFRS does not include a directive concerning how impairment losses are to be allocated; it is an accounting policy decision taken by a company in consultation with its auditors working with the appraisers. Two opinions are prevalent: (1) losses can be allocated according to the relative value of each asset based on the sum of DRC value for all assets in the CGU: e.g. a single asset representing 15% of total DRC asset value would be allocated 15% of the total impairment loss, or (2) Identify the assets that are the main cause of the economic obsolescence and allocate losses mostly to those assets: e.g. if a certain piece of equipment has a capacity to operate at 100 hours per week but is only used 50 hours per week and all other assets are utilized at capacity, then the underutilized asset be allocated most of the loss. (5)

We would urge our clients to continue to confer with their accounting and appraisal counsel on the potential impairment and impact on their financial statements. This could have a cascade effect on your tax and equity positions.

REFERENCES:

2020 PwC.. In Depth. A look at current financial reporting issues

Clare Beckker (2020). COVID-19 and Financial Reporting: 5 Things to Know.

2020 Chartered Professional Accountants of Canada. Financial Reporting Alert, May 2020, Accounting Standards for Private Enterprise (ASPE). ]

Ludmila Simonova (Unknown). Applying Business Valuation Techniques to Determine Economic Obsolescence of Real Property and Personal Property Assets for the Purpose of Financial Reporting in Europe

You Get What You Pay For!

In the world of professional valuation services we often hear the idiom that “you get what you pay for”. Usually the context behind this is “we offer three types of service”, namely:

• Credible and Reliable;
• Cheap; or
• Fast.

But you can only pick two:

• Credible and reliable and cheap will not be fast;
• Credible and reliable and fast will not be cheap; or
• Cheap and fast will not be credible and reliable.

At Suncorp Valuations we emphasize credible and reliable reporting that is completed on time and at a fair price, in accordance with our brand promise!

Those of you who use our services know that Suncorp always prepares and delivers a proposal which details our current understanding of the services to be conducted. We do this in order to establish the appraisal’s intended use, scope of service, our professional fee, and the required timing of our deliverables.

Recently, a new client to Suncorp advised us that they had obtained three independent proposals from suppliers who they thought were credible and reliable. In vetting these proposals, our client asked if we could help them better understand the variances between them and explain why our professional fee was the highest.

The first variance we identified was related to the “credible and reliable” premise:

Clearly two of the firms were proposing to utilize staff who had not obtained a designation from a recognized and regulated Appraisal Society. Each and every report that Suncorp Valuations prepares is reviewed and signed off on by one of our permanent, full-time appraisers, who have obtained an Accredited Senior Appraiser designation from one of the following recognized Appraisal Societies:

• ASA (Accredited Senior Appraiser – American Society of Appraisers – www.appraisers.org)
• MRICS (Chartered Member, Royal Institution of Chartered Surveyors – www.rics.org)
• AACI (Accredited Appraiser Canadian Institute – www.aicanada.ca)
• MAI (Member Appraisal Institute – www.appraisalinstitute.org)

These designations have rigorous requirements with respect to formalized training and articling experience which must be adhered to before a Senior designation within each Society is granted.

The second variance we identified was related to the “on time” premise:

Our proposal was the only one that addressed the timing of the deliverables to align with the intended use of the report (i.e. to assist the insurance broker with the placement of property insurance). At Suncorp we want to be timely in our reporting to meet our client’s requirements; not fast, but appropriately timed!

The third variance we identified related to disclaimers within our competitor’s proposals:

These disclaimers limited the competitor’s liability in the event that their final cost estimates were not adequate to replace the property in the event of a significant loss.

Suncorp Valuations believes that by combining appropriate liability insurance along with proper appraisal accreditation, this affords our firm the ability to withstand scrutiny of our value conclusions. As a prudent company, having been in business for over 60 years , our professional fees need to reflect the cost of being able to provide both services. Accordingly, our professional fees are not always “the cheapest” option. We are happy to provide clients with a copy of our “Certificate of Insurance” which outlines the coverage we have in place to protect them, in the unlikely event that there is an error in our final cost estimate.

In selecting your valuation services provider, we encourage you to conduct an “apples to apples” comparison to ensure your interests are represented appropriately.

Be wary of companies that limit their liability to a multiple of the fees paid for the service, along with those who do not utilize staff members with Senior Appraiser designations from one of the above-noted recognized Appraisal Societies.

To sum things up, “cheap and fast” is not always the correct answer, and to quote a man who has a proven record of accomplishment in measuring risk:

“Price is what you pay; value is what you get.”

— Warren Buffett