Addressing Underinsurance: desperately seeking validation

I recently wrote about the challenge of tackling underinsurance, a prevailing problem that’s only getting more severe as global labour, material and energy costs escalate.

One of the biggest factors contributing to underinsurance is the difficulty in obtaining an accurate valuation of a customers’ sum insured, taking into account current rebuild costs rather than a simple guess, or checking the market value.

In that article, I talked about the importance of taking a data-driven approach to accurately assessing the cost of rebuilding a property should damage occur, using all the data available to quickly calculate the value, but how can we be sure that the data we use is accurate?

Seeking validation

Validating such huge volumes of data from multiple sources, and having confidence in the cost being generated can be a tricky task for two key reasons:

• There are many ways of generating a rebuild value, and each method will produce a different result.
• The rebuild cost is just an estimate, the true cost is never known until the actual property is fully rebuilt and those costs are rarely available in sufficient numbers to be a useful measure.

We understand these challenges, and that insurers need to have confidence that they’re working to as accurate a cost as possible, both for their benefit and that of their policyholders.

At Addresscloud, we calculate rebuild costs based on the latest quarterly market figures, although currently we are updating these monthly!. Insurers can access these data continually and therefore can update their rebuild values to reflect current market conditions.  We also assess the cost of rebuilding just the property the insurer is interested in, whereas other methods use a more mass-market cost model and are based on larger scale projects, which invariably benefit from discounts for labour, material and access amongst other factors.

When comparing our costs to other rebuild cost calculators we see a strong correlation in these values, though ours are slightly higher than the average cost, we believe this is a more realistic reflection of the increased cost of a single build.

Our approach takes into account these key underlying features that are important in generating accurate, and timely rebuild costs:

• A sophisticated cost model built over many years and refined with leading insurers
• A data-driven approach with detailed property data from leading suppliers
• Quarterly cost updates
• Industry standard building components and material costs already in use with 100’s of construction companies and insurers
• Validations against known project costs

Accurately calculating rebuild costs plays a vital role in tackling the problem of underinsurance in our industry, and we’re taking a strong, data-driven approach to helping insurers to understand the current rebuild value of the properties on their books.