What Factors in Today’s Environment are Impacting Property Appraisals?

We’re living in an unpredictable environment – from economic disruptions to a hard property market to the impacts of COVID-19, there have been many factors in the last few years that have had an impact on property values and the need for accurate appraisals. Below we will take a look at some of these factors and what your business can control moving forward. 

Hard Property Market

The drivers of the hard property market that we are currently experiencing are ongoing CAT loss plus new arrivals of wildfires, convective storms, and winter storms. There has also been increased scrutiny of underwriting data and claims history that suggests ITV weaknesses and sustained lower interest rates.

 

CAT Loss Modeling 

Every major insurer and reinsurer uses CAT loss models to predict their development rates. 

Recently, we’ve all experienced major CAT loss events, including wildfires, convective storms, and winter storms (Uri). Modeled predictions result in increased scrutiny in underwriting data.  As these models continue to expand and evolve, so too will the need for more frequent reviews of your property data and schedules. 

COVID-19: The Old & the New  

The immediate impacts of COVID-19 on property appraisals were the economic shutdown and supply chain disruptions. We are now starting to see a few of the longer-term impacts, including demand surges, budget impacts, changes in labor practice, and remote working, leading to increased building vacancies. 

Demand surge is one factor that had and is still having a significant impact on property appraisals. Demand surge is the increase in the cost of repair or replacement of damaged property that may occur following a large-scale disaster when many individuals and organizations vie for a limited supply of labor and materials needed for a repair. 

(Source: IRMI) 

Climate 

Climate continues to be a huge environmental factor impacting the need for more frequent property appraisals. In 2020, there were 30 storms along the Coast, and in 2021 we witnessed record-breaking wildfires up and down the West Coast and an above-average Atlantic hurricane season.  As a result, insurers will continue to press for more accurate underwriting data and updated property values.

 

Economy & Construction Trends

Currently, the overall employment rate is at 3.6%, and the construction unemployment rate remains low at 6%, which suggests that increases in labor costs may continue. There have also been extended periods of historically low-interest rates, exacerbating the construction boom.   A clear example of this is the tremendous number of current K-12 and higher education bond programs. 

Things Your Business Can Control 

Even though there are several uncontrollable environmental factors that have impacted property values over the last few years, there are several things that you can control, including: 

  • Property Valuation Methodology: When evaluating property valuation methodology it is important to always be informed and review all policy language. Know what YOUR policy provides (and what it might not).
  • Valuation Frequency and Focus: The industry best practice is to anywhere from 3-to 7 years for onsite appraisals to ensure that you are keeping up with external and internal factors. 
  • Quality of Property Data: Always review COPE (Construction, occupancy, protection, and exposure) and important secondary characteristics when evaluating a submission for property insurance. 
  • Annual Adjustment of Your Values: Lastly, always make sure to perform a state-specific analysis and use a variety of sources to ensure a more accurate trend of your property values each year.

If you have any questions about property appraisals, our team would be happy to help. You can message Mark Hessel here.