UNDERSTANDING INSURABLE VALUE

UNDERSTANDING INSURABLE VALUE

A CRITICAL PILLAR IN ASSET VALUATION AND RISK MANAGEMENT

By Er. Sundeep Bansal
Published in: CEV Techno News, Renowned Newspaper for Engineering & Valuation Practice

Professionally structured and elaborated article suitable for publication in a renowned newspaper or journal targeted at engineering and valuation professionals, chartered engineers, architects, surveyors, insurance practitioners, and aspirants in India. This version considers Indian legal, regulatory, and market frameworks, while maintaining academic clarity and real-world applicability.

Introduction

In the realm of asset protection and financial risk mitigation, Insurable Value stands as a cornerstone. Defined as the monetary worth of an asset used to determine the appropriate insurance coverage, it represents the maximum sum an insurer would pay in the event of loss or damage to the insured property.

In the Indian context, where real estate dynamics are complex and property insurance penetration is growing, understanding and calculating insurable value correctly is vital for engineers, valuers, underwriters, and policyholders alike. Misjudging this figure can result in underinsurance or overinsurance, leading to serious financial and legal implications.

1. What is Insurable Value?

The Insurable Value (IV) is not necessarily the same as market value, but rather the cost to reinstate or replace the insured asset at prevailing rates—excluding the land component, which is inherently not subject to damage.

It serves as the basis for determining the sum insured, and hence the premium payable and claimable amount under an insurance contract.

2. Key Aspects of Insurable Value

a. Determining Coverage

The declared IV forms the coverage limit. If correctly calculated, it ensures that the policyholder is protected against financial loss, subject to the terms of the policy.

b. Market Value and Beyond

While IV may consider current market values, it leans more heavily on:

Reconstruction costs
Replacement of contents
Business interruption compensation, in case of commercial establishments

c. Land Value Exclusion

As per IRDAI norms and international insurance principles, the value of land is excluded from the insurable value because land remains unaffected by perils like fire, flood, or structural failure.

d. Importance of Accuracy

Underestimation results in inadequate claims
Overestimation inflates premiums unnecessarily
Insurers often apply the ‘Average Clause’, reducing claim payouts proportionally if underinsurance is detected

e. Role of Professional Appraisal

For complex structures or commercial assets, professional valuation by Registered Valuers or Chartered Engineers is critical, as per the Companies Act, 2013 and the Registered Valuers Rules, 2017.

f. Need for Regular Review

Inflation, building upgrades, and market trends necessitate periodic reassessment of the insurable value to maintain alignment with reality.

3. Factors Influencing Insurable Value

a. Depreciation

Physical deterioration, functional obsolescence, and age-related wear-and-tear reduce the effective value of an asset. IV calculations often factor this into depreciated replacement cost.

b. Inflation

Rising prices of construction materials, labor, and logistics escalate replacement costs over time—highlighting the importance of inflation indexing.

c. Replacement Cost Method

Most widely used approach, especially in property insurance. This involves estimating the cost of reconstructing the asset “as is”, without accounting for depreciation—unless policy terms dictate otherwise.

d. Policy Terms & Conditions

The chosen insurance product (e.g., Reinstatement Value Policy, Indemnity Policy, or Market Value Policy) directly influences how IV is computed and how claims are settled.

e. Valuation Methods

Common approaches include:

Cost Approach (Replacement or Reproduction)
Market Comparison
Professional Appraisals following IVS or Indian Valuation Standards

4. Practical Application: Flat/Shop Insurable Value Calculation

Assumed Data:

Built-up Area: 58.57 Sqm
Fair Market Rate: ₹31,000/Sqm
Construction Cost Rate: ₹20,000/Sqm
Construction Year: 2017
Total Building Life: 65 years
Salvage Value: 10%

Step-by-Step Calculation:

Replacement Cost = 58.57 × ₹20,000 = ₹11,71,400
Depreciation
= (8/65) × (1 – 0.10) = 11%
= ₹11,71,400 × 0.11 = ₹1,28,900
Depreciated Value of Building
= ₹11,71,400 – ₹1,28,900 = ₹10,42,500
Excluding Land Value
- Land Rate: ₹11,000/Sqm
- Land Value: 58.57 × ₹11,000 = ₹6,44,270
Fair Market Value (FMV)
= Land + Building = ₹6,44,270 + ₹10,42,500 = ₹16,86,770
Insurable Value = ₹10,42,500 (only the building component)

5. Consequences of Misstating Insurable Value

a. Undervaluation:

Pros:

Lower premiums

Cons:

Underinsurance
Proportionate claim settlement (Average Clause)
Legal delays or disputes

Example:
If insured for ₹8 lakh instead of ₹10.42 lakh, and damage of ₹5 lakh occurs, insurer may pay:

₹5 lakh × (₹8 lakh / ₹10.42 lakh) = ₹3.84 lakh only

b. Overvaluation:

Pros:

Adequate coverage buffer
Faster processing (in some cases)

Cons:

Higher premium outgo
Risk of insurer investigation for moral hazard
Potential disputes if valuation is unjustifiably inflated

6. Legal and Regulatory Context in India

Insurance Act, 1938: Governs insurer conduct
IRDAI Regulations: Define guidelines on insurable interest, policy wording, and sum insured mechanisms
Companies Act, 2013: Requires registered valuers for specific asset valuations
Registered Valuers under IBBI: For regulatory-compliant professional reports
Indian Evidence Act, 1872: Courts may rely on certified appraisals in claim disputes

Insurable Value is not a speculative figure—it’s a calculated representation of risk exposure, restoration cost, and insurance adequacy. For professionals, especially in engineering and valuation fields, mastery of insurable value determination is no longer optional—it’s imperative.

With India’s rapid urban development, increasing disaster vulnerability, and a maturing insurance ecosystem, valuers and engineers must align technical acumen with regulatory understanding. Properly declared insurable values not only safeguard properties but also bolster trust in the insurance ecosystem.

Recommendations for Practitioners:

Always exclude land value
Use current construction rates from credible sources (CPWD, PWD, Builders’ Association, etc.)
Consider building improvements and services
Maintain detailed records for audit trails
Stay updated with IRDAI guidelines and valuation standards

About the Author:
Er. Sundeep Bansal is a Chartered Engineer and IBBI-registered valuer with over 32 years of experience in property valuation, insurance advisory, and engineering audits. He regularly contributes to academic and professional publications in India.