Insurance Academy

Why is it So Hard to Agree on Valuation?

By Patrick Wraight | June 27, 2018

I really hate reopening this can of worms, but I’m living it so here goes. My wife and I are doing some house hunting lately (in case you’re wondering, it’s not at all like the show, we’ve looked at a whole lot more than three options and it definitely wasn’t all resolved in under 30 minutes). I generally can’t complain. My wife, our realtor, and our bank have all been great on this journey.

Part of our journey has included our budget for a house payment, and that includes finding out what homeowners’ insurance would cost on these different houses. In fact, before we’ve made offers on any houses, we’ve gotten quotes for insurance a few times. (I have to apologize to my agent for getting extra practice submitting applications for quoting because of me.) That part of our journey brings me back to a conversation that we’ve recently had on the blog (yep, I’m reading your comments so keep it professional, please).

In quoting the insurance on these houses, I’ve seen wildly different replacement cost numbers for one house. On one house, I got quotes where the replacement cost varied by over $50k (yes, over 30% variance between companies). I even had one online agency (yes, I tried one of those, too – stop judging me, it’s research) quote me a low limit, and provided me the ability to adjust that up by almost $60k!

By the way, I’m not complaining about it. I understand why it happens. It just provided me an additional perspective for the blog. This time, I want to discuss why you’ll get different valuations from different companies. It’s not as mysterious as you think; nor is it as nefarious as you might think, either. It really has more to do with the differences between companies.

Differences in software

There are a bunch of us in the industry that remember the manuals. You know the ones that I’m talking about. You manually looked up the information about a dwelling and manually used what the book told you to calculate replacement cost estimates. These days, we’re all using one online replacement cost evaluator app or another. You probably know the names, so let’s not dive into which one is best, worst, or whatever. We do need to understand that they’re different. If they were identical, at least one of them would have no differentiation and would find themselves run out of the market.

There can be a difference in starting point. What I mean is that different apps use a different basis of their valuation. There is at least one that starts out with an average cost per square foot based on the zip code and construction type. That cost per square foot is then adjusted based on the rest of the data provided. Another app uses their own reported claims data for construction materials within the zip code for their basis and adjusts from there. While the start points may be very close together when the valuation starts, the more data that are provided, the farther apart they can go.

There are other differences between the software that don’t directly affect the valuation. Some are just simpler to use. In their attempt to streamline their interface or make it easier for the end user to operate it, they may not ask the identical questions that another app does. There is often some subjectivity to the application that means that one person entering information interprets information, pictures, and labels differently. One person’s standard may be another person’s custom.

Differences in data

We already mentioned that different valuation software may have different starting points, but there are more differences in data that we need to explore. One really simple difference is that different applications ask for different required data points. You might think that they all ask for the same things, but they really don’t. Sure, the basic data are the same, but I know of one application that once you enter the very basic dwelling data, it generates an estimate and you can use that without adding any more detail. Another application will provide what it calls an initial estimate and then direct you to add more detail.

Another difference between applications goes back to the data starting point. Many of these applications have the ability to reach out to property appraiser websites to gather the initial data for the estimate. The other side of that coin is that some might cache data and not refresh it frequently. A company’s estimator may also have data from a previous application so they may also have more (or less) data than another company.

Differences in detail

The level of detail provided to the company will change the valuation, sometimes significantly. I started a homeowners’ quote online during my home search and when I added the address, the initial quote came up with two different valuations. One was called “economy” and the other was called “responsible”. I’ll have to deal with that verbiage another day. When I provided the basic level of detail, the valuation provided me with one number. When I started to add detail, based on what I knew after visiting the house. Yes, I house hunt with my insurance brain turned on, don’t you?

As I added the proper level of detail to the quote, the replacement cost continued to adjust upward. This fits with what I’ve experienced in my underwriting days. The more detail that you enter into a valuation estimator, the more that the value will change. Sometimes, details even make the cost go down.

In practice, what this means is that if we provide more detail about a dwelling, the valuation software can produce what amounts to a more accurate estimate of the replacement cost. However, going back to something that I mentioned earlier, most of these applications will provide an estimate at the beginning of the process, which a company or an underwriter might find to be perfectly acceptable.

Differences in proficiency

Now I have to deal with a few points that I really don’t want to. Different companies have different levels of proficiency with the software that they use. Yes, different people within the companies have different levels of proficiency with their software. Some people are new, and they don’t know all of the ins and outs of their valuation software. They may not know to go into another menu and make certain selections. At one company, whenever underwriters ran valuations on mobile homes, they had to unselect certain items when they selected upgraded items (such as larger water heaters). If they didn’t it would skew the valuation.

Differences in perspective

I’m going to admit something that hurts me (a little). Some companies believe so much in their information that they can’t have a conversation that maybe their valuation might be inaccurate. I said it. It hurt, but I did it. If I were an underwriting supervisor, I would back up my people as often as possible. However, if I found that they made a mistake, or that they refused to consider information from sources (other than our software) I would have to help correct their perspectives.

Some companies won’t accept anything that isn’t generated from their software and that’s a problem. If an agent submits a legitimate appraisal, valuation, or report that makes sense, it should be used. If the dwelling is a new purchase, the applicant may have gotten an appraisal that includes an insurance valuation estimate. Look it over. Does it make sense? Why not use it? If the agent runs a valuation on software that they subscribe to, why not review that and see if that valuation makes sense? In the end, we should be making it easier to write business rather than making it harder and if using another company’s valuation is possible, why not do it?

In this discussion, we have ignored coinsurance or other requirements. Let me give you my 10 cents worth on this. This is my opinion (which you’re used to by now), but we should encourage customers to try and value their homes (commercial buildings, too, but I’m mostly thinking about homes right now) with limits as high as they can handle and that make sense. I’m not an advocate of overvaluing a building because it creates a potential moral hazard, but I do advocate getting the highest limit that makes sense because almost no one has more money then they need in the event of a loss.

Back to my thought, with that limit, since companies will provide a rating factor for coinsurance, if there is a coinsurance option on the policy, go with 80% or 90%. Never give your customers a 100% coinsurance option on their policies. Think about it for a minute. If you don’t review valuations for a couple of years, it’s possible that the valuation doesn’t keep pace with actual costs in the area and if there’s a 100% coinsurance requirement, the customer could have a problem.

I know that companies can be frustrating with their blind devotion to their valuation software sometimes and that agents can be frustrating with their blind devotion to lower prices sometimes. Let’s say it this way; we all get on each other’s nerves. How do we fix it? It’s a conversation. It’s taking time to learn from each other. It’s doing the best for the customer and believing that everyone wants what’s best.

About Patrick Wraight

Patrick Wraight, CIC, CRM, AU, is director of Insurance Journal's Academy of Insurance. He can be reached at

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Latest Comments

  • July 10, 2018 at 10:04 am
    Frank A. Lombard CPCU ARM says:
    It would appear there should be some response to the suggestion I read the California Replacement Cost regulation. Correct me if I'm wrong but that regulation seems to say if ... read more
  • July 6, 2018 at 11:28 am
    Frank A. Lombard CPCU ARM says:
    I have read that decision and I believe it doesn’t change the home insurance policy language which clearly states replacement cost for required amount of insurance purposes ... read more
  • July 6, 2018 at 10:05 am
    Old Dog says:
    I suggest reading article in Property Insurance Law Observer from Jan 2017: "California Supreme Court Upholds Replacement Cost Estimate Regulation (For Now)". My take-away is ... read more

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