When considering property appraisals for captive environments, there are many issues that should be taken into account. Captive insurance, as a form of self-insurance, often involves unique and complex risks. Accurate property valuations can play a vital role in ensuring appropriate reserve levels are maintained and supporting effective risk management, regardless of the insurance structure.
Understanding the Benefits of Appraisals for any Property Program
Captive insurance strategies are distinct from traditional insurance in that they are specifically designed to protect the risks of their owners or members. This close relationship often means the underlying property exposures have specialized uses or unique attributes. As with any coverage consideration, onsite appraisals help account for these unique characteristics to ensure the property is adequately valued and protected.
Frequently, the temptation is to treat multiple properties as “homogeneous risks”. Unless unique characteristics are considered in an appraisal, there is risk that the property is not being insured-to-value. Inappropriate reserve levels result in increased risk – whether too low or too high. Captives need to be certain their property values accurately state their true replacement cost, considering all factors including location, materials, and labor costs.
Risk Assessment and Management
An effective property appraisal for any complex portfolio must also involve a thorough, systematic risk assessment. This should consider the likelihood of various risks, such as natural disasters, fire, theft, and how these risks might impact each specific property. This approach ensures that the owner understands potential exposures and is confident in their coverage.
Collection of standard as well as secondary C.O.P.E. data assists property owners with a deeper understanding of exposure to (and modeling for) catastrophic losses. Many of these critical property data elements cannot be easily or accurately collected without an actual, physical inspection of the subject properties.
Continual Property Appraisal Reassessment
Given the specialized nature of property valuation for insurance purposes, it’s important to engage appraisers who have specific experience with complex appraisals. Expertise is vital in ensuring that the property is valued and recorded appropriately, protecting the captive against unwanted risks.
A thorough appraisal program should also include continuous reassessment to ensure that valuations remain accurate over time. This is particularly important in dynamic markets or in cases where property use or characteristics change. Regular reappraisals and accurate trending between onsite visits ensure confidence in coverage and allow adjustments to meet changing needs.
Properties which are NOT subject to an appraisal in given years should be adjusted annually to “trend” values reflecting construction cost changes in specific markets and for specific classes of construction. This annual and cost-effective strategy helps eliminate surprises the next cycle when actual reappraisals are performed.