Many firms are failing to adequately cover their assets, finds Susan Davies, leaving them open to potential financial losses and risking the long-term viability of their business
Despite the expertise with which many commercial firms run their operations, it is incredible how so few understand the true value of their assets and what would be required to replace, repair or reinstate them in the event of loss or damage.
What is perhaps more surprising is that many brokers do not proactively recommend that their clients conduct regular valuations of those assets for insurance purposes. This is despite the legal duty they bear to ensure clients carry the right level of cover and the implications it may have for their own business should they get it wrong for clients.
One needs look no further than the UK/USA foreign exchange market. The struggling dollar and appreciating pound have had the effect of making US-originated plant and machinery much cheaper than their UK counterparts. Similarly components for these capital goods will also be less expensive and so insurance valuations need to reflect this important change in circumstances.
There are also many other external influences, which many firms simply do not consider when it comes to valuing their assets.
One of the major changes in recent years has been the rise in metal prices as developing countries such as India and China suck in these commodities and by doing so, have created a huge demand for such materials.
This has meant that the price of raw materials needed for rebuilding or repairing structures here in the UK has also risen. Only by looking at the broader picture is it possible to get a clear understanding of these issues and this is a difficult and time-consuming exercise for businesses to carry out on their own.
It also requires a level of expertise across many different disciplines and providing this technical knowledge on an in-house basis is expensive. Most businesses naturally try and concentrate all their resources on servicing their customers and boosting their bottom lines.
However, it is a mistake to ignore the true value of a commercial enterprise's assets. Accurate insurance valuations are vital to any business for two very simple reasons.
If a firm is over-insured it will be paying higher premiums than necessary for protection it does not need. In this instance a valuation can result in substantial savings.
However, if too little cover is in place then claims may be subject to an average assessment or simply be rejected. When an incident occurs firms need to know their insurance will work quickly, effectively and provide the right level of financial support - that's the whole point of having cover.
Many firms believe they have a clear picture of the reinstatement value of their assets. It is only on closer examination that they realise how poor a representation this may be.
An organisation that has not had a valuation carried out within the last three years is virtually certain to be sitting on a figure that is outdated and fails to represent a true value of its assets.
It is important for businesses to realise not only how much the environment in which they operate changes, but also how much their own business environment evolves over the years.
It is easy to neglect, or fail to understand, the impact that disposals, acquisitions and refurbishments can have. As businesses develop so do their functions and portfolio of assets.
It is the broker's duty to ascertain whether any such changes could have an impact on the insurance valuation.
Whether firms have always managed their own insurances or are only beginning to take control of them due to evolving corporate structures, ongoing valuations will help tailor the correct insurance package and deliver the right level of protection to the firm. Regular valuations also ensure that the task of keeping values up to date is cost effective, as a regular and complete history of valuations builds up into the future.
One of the biggest headaches for any firm suffering a major loss is to compile an accurate and up-to-date inventory of everything that has been affected from property to plant and machinery and general contents.
Who holds this information? Where is it kept? Is it on the computer system, which may be down? Has it been destroyed in the loss?
As part of any third party valuation, a detailed inventory will be drawn up and protected in offsite premises. That third party will also take responsibility for the calculated values - this removes the burden from the finance, insurance or risk manager.
Some brokers may baulk at recommending that their clients undertake regular valuations, believing that this will inevitably lead to higher premiums. In cases where assets are undervalued then yes, premiums will rise. But to do anything else would be a disservice to the client as under-insurance could mean the end of the business. In contrast, some firms have actually seen premiums fall because they have been carrying too much cover, as the existing valuation was incorrect.
The more robustly a firm protects itself from potentially damaging events, the better placed it will be for long term success. The most successful commercial firms have a very detailed understanding of the value of their products and services and how they should charge clients for these.
There should be no doubt that insurers operate from the same principles and unless the cover in place truly represents what is being protected, someone will lose out. Invariably it is the businesses that either pay too much for their cover, or see claims rejected because of inaccurate pricing, risking their own long-term viability. An accurate valuation means they should never find themselves in this situation. IT
Susan Davies is director of Rushton International