Fire and General insurance brokers across New Zealand have an opportunity to significantly lower existing client (and new business) property reinstatement insurance premiums because of a post-COVID error.
Construction Cost Consultants are finding numerous occasions where registered valuers are applying very high inflation rates, which compound as the years roll on, leading to unrealistic and unnecessary premiums for property owners.
Rebuild Valuation nearly half the current Sum Insured
For example; a broker recently approached Construction Cost Consultants with a childcare centre in Queenstown that was insured for $5,279,000. When we completed the Commercial Rebuild Valuation the Reinstatement Value was a mere $2,718,868 (excluding demolition costs).
A review of valuations from 2020 and 2022 identified the problem as over-insurance from compounding over-inflation over four years.
Expectations of high inflation and other issues, such as shortages of building materials and logistical delays, led to applying high inflation rates to reinstatement policies to accommodate expected increases.
For example, in the Queenstown case, brokers added a 12% inflation provision. In 2022, this had compounded to nearly a 22% inflation provision.
An error provoked by post-Covid uncertainty
Construction Cost Consultants’ senior quantity surveyor for insurance, Scott Taylor, says that post-COVID, many registered valuers have been using high inflation rates due to post-pandemic uncertainty. This over-insurance is problematic because insurance rates continue to rise, and capacity becomes scarcer across various regions.
“In 2023 and 2024, the broker, in this case, increased the sum insured by percentages to cover inflation, leading to a current sum insured of $5,279,000. However, our building assessment suggested these rates were excessive. For example, a 22% inflation rate from 2022-2023 and a 22.5% increase from 2023-2024 were applied. These rates were unrealistic, as building inflation, while high, has not reached such levels.
“In this case, the current sum insured value of $5,279,000 translates to $10,500/m², which is unrealistic for a basic childcare centre,” says Scott. “These values are approaching architectural mid to high-quality house build costs in Queenstown with schist cladding and designer kitchens, quality flooring and tiling.”
The 2022 figure alone is high, at about $7,000/m² without the inflation provision for a very basic childcare centre with nice cladding.
Very high costs in building materials failed to eventuate
“Cedar was very expensive around 2022 into early 2023, but it has calmed down substantially. Externally, the building has nice cladding and some nice glazing, but internally, the centre is very simple. The flooring is basic, the joinery is very basic, the electrics are all basic, and there are no architectural or designer features internally,” says Scott.
While meant to safeguard against future inflation, this approach has instead resulted in clients paying premiums for inflated sums that do not reflect actual rebuild costs.
Regular and accurate Commercial and Residential Rebuild Valuations are recommended to avoid over and under insurance.
The solution to curbing compounding inflation
Working closely with quantity surveyors like Construction Cost Consultants—who have their fingers on the pulse of market developments, including material cost and availability—will provide accurate sums insured based on current market conditions and construction costs.
Regular monitoring can help clients pay premiums based on realistic sums insured, not only saving money but also freeing up capacity for additional risks, which provides brokers with a significant competitive edge.
