Property Reference Paper
Updated: May 2
For homeowners, premium increases may seem counterintuitive. It’s difficult to understand why they’re paying more to protect a house that may have lost significant value. To help them understand what seems like counterintuitive pricing, we need to clarify two key concepts:
Valuations are based on(including materials, labor, overhead, and profit), not on the home’s appraised or market value.
Material costs are based onWhen energy and building-material costs rise, the cost to reconstruct a home rises.
Key Concept #1 – Reconstruction Cost
When people talk about “housing values,” they can be talking about any five possible ways to value a property. Our Coverage A amounts are based on No. 5, reconstruction cost:
Appraised– Appraiser’s opinion of the current worth (market value) of a property based on factors such as area, location, improvements, and amenities.
Assessed– Value placed on real estate or personal property by government assessors for tax purposes, including land costs, site improvement costs, and other considerations.
Market– Highest estimated price that a buyer would pay and a seller would accept for property in a competitive market.
New construction cost (insurance purposes)– the cost to replace, at one time, an entire building of equal quality and utility. New construction cost doesn’t account for code-required improvements, demolition, debris removal, site accessibility or site work, extraordinary fees, premiums for materials, and other contingencies.
Reconstruction (or replacement) cost – The cost to construct, at current prices, an exact duplicate or replica of the building, using like kind quality materials, construction standards, design, layout, and quality of workmanship. It also includes site-specific and process-related costs and fees not included in new construction:
loss of economies of scale associated with new construction
extra costs due to site accessibility and limited site mobility
possible change in the usual building sequence of events
extraordinary fees and other contingencies
reuse of building components or mechanical systems below grade level
time urgency to reduce Additional Living Expenses and get homeowners back in their homes
dealing with dangerous/hazardous materials and/or mold concerns
presence of dangerous/hazardous materials and/or mold concerns (but not including remediation costs)
consideration for adjoining non-construction areas or the insured’s undamaged property on the site.
Key Concept #2 – Component Pricing
Our current valuation tool, Marshall & Swift/Boeckh’s (MSB) Residential Component Technology (RCT), uses component pricing to calculate valuations. That means it adds the prices of all of the building materials PLUS labor, PLUS overhead, and PLUS profit specific to the property’s location to get the valuation. It doesn’t use a dollars-per-square-foot type of calculation.
As the price of the components increase, the cost to rebuild a home increases. And even when the cost of some commodities drops, the cost of others may rise. For example in 2011, the cost of gasoline climbed 37%, copper rose about 20%, and plywood increased by about 8% – all of which added to the cost of rebuilding a home after a loss.
Every quarter, MSB updates the component costs for each ZIP code. Whenever we run RCT valuations for new policies, they’re based on the latest costs; existing policies are updated via value-up or recalculating. (As of June 2011, PEMCO uses value-up factors to adjust Coverage A at renewal. Value-up percentages are adjusted quarterly.)
Market value – the number that’s top of the mind for most homeowners – doesn’t factor in on RCT.
RCT is our current and best way to calculate construction costs. When we input complete, accurate data, it does an excellent job of calculating appropriate valuations. That said, it’s just a tool. Our goal is to establish the most appropriate valuation for the property on which we’ll base our coverage. Sometimes, we need to physically inspect the property to validate the information provided and, perhaps, adjust Coverage A to a level that the customer and we can agree upon.
Responses to consider when helping customers understand valuations:
Objections: “My house isn’t worth that much,” “That’s more (or less) than I paid for the house,” or “I could buy a new house for less.”
Reconstruction cost is based on the cost to build, at current prices, an exact duplicate or replica of the building, using like kind and quality materials. It’s not tied to the home’s market value.
Objection: “I could get it rebuilt for less.”
Many customers assume insurance companies pay inflated prices and that they could do it themselves or hire a contractor for less. They’re usually not considering the reconstruction costs definition above that includes the quality f the material, construction standards, design, layout, and quality of workmanship or any of the additional costs and fees not included in new construction.