Reviewing property values for replacement cost is somewhat of an annual tradition for any insurance buyer. The process usually resembles something of a list of properties, the current value, and then an increase based off that value – usually 2% more. While this was “good enough” in 2009, 2010, 2011, 2012 and into 2013, the average annual increase since then has been above 4%. This means increasing 2% since 2013 has left over 50% of actual inflationary cost unaccounted, not to mention the compounding effect of that change over five years.
The Turner Building Cost Index provides a view into quarterly inflation costs, and rolls those into an annual average change. While inflationary costs can be regional across the United States, the average is a good determination of actual costs for insuring purposes. The current year is on pace to be above 5%, following 4.7% in 2016 and 5% in 2017, respectively. The impact of these adjustments against a building valued at $1,000,000 in 2013 are notable: at 2% annually the building would be insured at $1,126,162 while at the average inflation factor the building would be $1,310,970, or $184,807 higher.
These costs have real consequence at the time of loss, and should be reviewed more closely than what the annual tradition may usually involve. Cost estimators are good tools to get close, but paying particular attention to the construction environment in your own area will prove more beneficial. If you live in an area that has new residential construction, public bond issues for capital improvements, college or universities growing, commercial real estate expansion or multi-occupancy commercial development, then it’s a good indicator that you’ll see inflationary targets at the higher end of the average.
Knowing the value to replace a structure is important in the insuring process, because it can have impact at the time of loss. Insurance value is important to recognize apart from market value or property assessment values. The cost to replace – rebuild the same structure – is what is being insured and purchased (a potential loss at a future time). Acknowledging the impact of inflation and the type of property insurance being purchased will influence the selected insured value.
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