INSURABLE VALUE

INSURABLE VALUE

Saturday Brain Storming Thought (286) 02/08/2025

Insurable Value is the monetary worth of an asset that is used to determine the appropriate coverage amount in an insurance policy

It represents the maximum amount an insurer is willing to pay out of the insured property is damaged or destroyed

The value is crucial for ensuring adequate protection and preventing underinsurance or overinsurance

Key Aspects of Insurable Value

1) Determining Coverage

The Insurable Value is used to set the limit of coverage in an insurance policy

This insures that the insured is adequately protected against potential losses up to that limit

2) Market Value and More

It often reflects the current market value of the asset, but can also include additional factors like the cost of rebuilding, replacement of contents and potential business interruption costs

3) Exclusions

Land value is often excluded from insurable value calculations, as land typically does not incur losses

4) Importance of Accuracy

Accurate assessment of insurable value is essential to avoid financial strain in case of a claim

Underestimation can lead to insufficient coverage, while overestimation can result in paying higher premiums than necessary

5) Professional Appraisal

For complex assets like buildings or businesses, a professional appraisal can help determine the Insurable value

6) Regular Updates

Insurable Value should be reviewed and updated periodically to reflect changes in market conditions, property improvements and other relevant factors

Factors influencing Insurable Value

1) Depreciation

Explain how depreciation (wear and tear, obsolescence) affects the value of an asset over time and its impact on insurable value

2) Inflation

Discuss how inflation can increase the cost of replacing or repairing an asset, thus impacting insurable value

3) Replacement Cost

Explain the concept of replacement cost and how it relates to insurable value, particularly in property insurance

4) Policy Terms and Conditions

Highlight how the specific terms and conditions of an insurance policy can affect the insurable value

5) Valuation Methods

Discuss different methods of determining insurable value, such as appraisals, market surveys or professional assessments

Insurable Value Calculation for Flat/Shop

1) Calculate the cost of rebuilding

This involves estimating the current cost of construction per square meter for a similar building, factoring in labor, materials and any unique architectural features or finishes

2) Consider Depreciation

For building, depreciation is the reduction in value due to age, wear and tear, obsolescence

Deduct depreciation from the replacement cost to arrive at the Insurable value

3) Exclude land Value

The value of the land in the property sits on is not included in the Insurable value, as it is not subject to damage or loss

Example of insurable value calculations

Data Assumed

1) Flat Built up area : 58.57 Sqm

2) Fair Market Rate of Flat : Rs 31,000.00/Sqm

3) Building Construction Cost : Rs 20,000.00/Sqm

4) Year of Construction : 2017

Analysis

1) Fair Market Rate : Rs 31000.00/Sqm

2) Building + Services : Rs 20,000.00/Sqm

3) Land component Rate : Rs 11,000.00/Sqm

4) Age of Construction : 8 years

Total Building life assumed 65 years

Salvage value assumed as 10%

5) Replacement Cost = Built-up area X Replacement Rate

= 58.57 Sqm X Rs 20,000.00/Sqm

= Rs 11,71,400.00

6) Depreciation : (Age of building/total life of building) X (1 – Salvage value percentage)

= (8/65) X (1 – 0.10)
= 11%

Depreciation = Replacement cost X Depreciation

= Rs 11,71,400.00 X 0.11
= Rs 1,28,854.00
Say Rs 1,28,900.00

7) Deprecated Value of building = Replacement cost – Depreciation

= Rs 11,71,400.00 – Rs 1,28,900.00

= Rs 10,42,500.00

8) Building + Services component rate = Deoreciated Building value / Built-up area

= Rs 10,42,500.00 / 58.57 Sqm

= Rs 17,799.21 / Sqm
Say Rs 17,800.00 Sqm

9) Fair Market Value

= land Component Value + Building component value

= (58.57 Sqm X Rs 11,000.00/Sqm) + (Rs 10,42,500.00

= Rs 6,44,270.00 + Rs 10,42,500.00

= Rs 16,86,770.00

10) Summary of Valuation

A) Building Fair Market Value = Rs 16,86,770.00

Land Value = Rs 6,44,270
Building Value = Rs 10,42,500

11) Insurable Value

Rs 10,42,500.00

(Land Component Value excluded from building market value)

Undervaluing Insurable Value

Advantages

Lower premiums : Insurers calculate premiums based on the declared insurable value

Lower value leads to lower premium

Disadvantages

1) Underinsurance : If a loss occurs, the payout might not fully cover the actual replacement or repair costs of the asset

2) This can result in significant financial burden on the policyholder

3) Proportionate Payouts : Many insurance policies have clauses that reduce the claim payout proportionately of the declared value is lower than actual value

4) Potential for legal disputes : Insurers might deny or reduce payouts in cases of underinsurance, potentially leading to legal disputes and delays

Overvaluing Insurable Value

Advantages

1) Adequate coverage : Overvaluing ensures that the insurance payout will fully cover replacement or repair costs in case of a loss

2) Potential for faster claims processing : In some cases, claims might be processed more quickly if the declared value is clearly sufficient to cover the loss

Disadvantages

1) Higher Premiums : Overvaluing leads to higher insurance premiums

2) Potential for Moral Hazard : Insurers may be concerned that policyholders might intentionally cause damage or claim losses to profit from the inflated insurable value

3) Risk of Policy disputes : In extreme cases, if the overvaluation is significantly higher than the actual value, insurers might investigate for potential fraud or moral hazard, which can lead to disputes or delaysCompiled by