By Thomas Allman MRICS
Back in the day (or so I’m told!) insurance valuations were ‘all the rage’. 40 years ago or so, insurance valuations made up a large proportion of an asset valuer’s work load. One reason for this could be the high inflation back in the 1970s meaning that under insurance was an even greater risk than it is today. Most insurance policies offer a ‘new for old’ replacement basis in the event of loss, and back then new replacement costs went up by significant sums year upon year, and unless they were regularly reviewed, insured values would often lag behind at inadequate levels.
It seems to be that as UK inflation has settled down (stabilising to a target of 2% a year since Tony Blair came into power 18 years ago and currently sitting at barely anything), so the perceived requirements for insurance valuations seem to have waned. And yet, with exchange rates still being the major factor affecting changes in new replacement costs, it seems strange to me that more Directors are not concerned about under insurance. Surely more of them should realise that it is the duty of Directors to ensure that a business’s assets are insured at the correct replacement cost. With the strengthening of the pound against the Euro in recent years, whilst weakening against the Swiss Franc, new replacement costs in GB£ for internationally manufactured machines (which most machines are, sadly) are not easily estimated. Companies with significant fixed assets whose Directors neglect to revalue their assets each year are putting their shareholders’ interests at risk. An insurance valuation need not be a costly exercise and could potentially save shareholders millions of pounds in the event of a loss. Whilst (rightly) large budgets are allowed for physical loss -prevention measures (risk aversion in the more obvious sense), under insurance is only perceived to be a problem as and when a loss occurs.
The RICS regulated services that Marriott & Co. and our contemporaries can provide, are of benefit to manufacturing businesses. With Climate Change seemingly contributing to more extreme weather worldwide (UK flooding being a prime example), now is the time to remind directors of the potential devastation from which their companies might not recover unless their sums insured have been correctly declared.
Quite simply, many manufacturing companies are under-insured, thereby risking receiving only a proportion of the value lost in any claim. Companies that are professionally advised and adopt an up-to-date plant reinstatement assessment, are doing all they can to eliminate the risk.
n.b. the RICS guidance has changed over the years in that when I started carrying out valuation work in 2007, we were not supposed to use the term ‘insurance valuation’ (which was historically what such exercises had been known as) because technically it is not a valuation but rather a cost estimate, however, in recent years the term has come back into usage in RICS correspondence and so some people have reverted back to using the term (and I am sure many people never stopped using it in the first place!).