Insurers Continue to Improve Their Home Valuations, Says MSB

August 12, 2013

The insurance industry is doing a better job adequately valuing residential construction, according to Marshall & Swift/Boeckh (MSB), a provider of building cost information.

MSB’s 2013 Insurance to Value (ITV) Index report for 2013 shows 60 percent of homes in the U.S. are undervalued by an average of 17 percent. These figures represent an improvement from last year’s numbers of 61 percent of homes being undervalued by 18 percent.

The ITV Index has improved dramatically since the 1990s, when nearly 73 percent of homes were undervalued by 35 percent. Insurance companies that have not instituted new underwriting procedures to carefully value coverage limits at the time policies are first written and at the time policies renew still see 73/35 as their statistical norm, according to MSB.

But that is changing.

“A critical mass of carriers are moving to more sophisticated by-peril pricing models,” said Steven Brewer, senior vice president, Underwriting Solutions for MSB. “This is motivating homeowners carriers to validate and archive detailed property characteristic profiles on their legacy books of business.”

Brewer said these updated profiles not only fuel better pricing segmentation, but also allow carriers to identify and update undervalued homes. “This enables them to generate risk-adequate premium on each property in the book, while properly protecting the policyholder,” said Brewer.

Since the movement to by-peril rating sophistication has gained broad acceptance, home insurance writers have begun a more diligent review of their legacy books of business, netting the current 60 percent/17 percent statistic. Along the way, the industry improved coverage and premium adequacy, with nearly $9 billion in lost premiums recovered annually from recalculating the base with more adequate protection for policyholders.

Increased use of modern “component-based” estimating programs has also improved coverage adequacy, since true replacement cost values are now calculated on a risk-specific basis.

The current ITV Index update represents the national average trend for homeowners insurance written in the U.S., according to MSB.

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