Valuation issues create business opportunities

A great deal of consumer education is needed following recent changes in the housing market. This will in turn create opportunities for insurance advisors to strengthen relationships with clients and build up their practices.

Many consumers are confused by housing valuations and the recent spate of interest rate hikes has compounded the situation. "New home buyers are entering the market and consumer education on these issues has become vital," says Merrick Oeschger, Executive General Manager for Business Development and Sales at Mutual & Federal.

"Misunderstandings often result from the growing habit among relatively new home owners of using municipal valuations as the benchmark for housing insurance cover. Some consumers assume a property owner's insurance cover and municipal valuations are closely linked. In fact, the valuation protocols are fundamentally different."

Differences in valuations

The confusion can be traced to the different valuation methods used by municipalities and insurance companies.

The municipal methodology can be highly sensitive to interest rate hikes while the insurance model is driven by construction sector inflation. Municipal property valuations are based on the market value of the buildings (including improvements such as a swimming pool and tennis court) and the land. In contrast, insurance companies' valuation considers only the buildings, improvements and fixed items such as boundary walls. The land value is specifically excluded.

Replacement values going up

Consumers might assume insurance valuations are stable or falling because the housing market is cooling off. In fact, replacement values are being driven up by the higher cost of labour and building materials.

Any market value calculation will be affected by the current state of the property market. A key variable here is interest rates. The key to replacement values, however, is the cost and availability of labour and materials.

"Dwelling size can also result in disparities," notes Merrick. "On a market valuation basis, a small property in a highly desirable suburb would usually be more highly valued than a large property in a less desirable area. However, more labour and materials would be needed to replace the larger property, resulting in a higher valuation for replacement purposes."

Potential problems

"This creates two potential problems – possible under-insurance with the danger that the sum insured will not cover replacement or possible over-insurance when the consumer would be paying a higher premium than necessary," adds Merrick.

Financial institutions that advance home loans may adjust the cover from time to time or carry out their own valuations, but the ultimate responsibility for maintaining appropriate cover rests with the owner.

Broker's role

"An intermediary can add considerable value to client relationships by explaining that different methodologies exist while alerting the client to the need for a valuation based on replacement costs. Intermediaries can provide a much-needed service by encouraging clients to update the replacement values of their homes. Even after a year, these values can shift significantly," suggests Merrick.

"In addition, a regular review of a client's general short-term insurance needs is always a good idea. Market education in an important area like changing valuations could well be followed by significant new business gains by responsive intermediaries."