Pitfalls in Valuation Can Be Detrimental to Stable Insurance Industry, Says GE Insurance Solutions White Paper.

KANSAS CITY, Mo. -- Commercial property values must be correctly quantified by agents, brokers and customers so that insurers are able to charge adequate premiums for the risks they assume, according to Tom Smith, Vice President, Regional Product Leader, for GE Insurance Solutions.

Smith has authored a white paper called "Getting It Right: Property Insurance Values" in which he highlights the dangers to insurers as well as customers of under-valuing property and business interruption risks.

"Insurance-to-value (ITV) calculations are used to quantify the potential dollars at risk and help determine the proper amount of premium to charge," said Smith in his paper. "It is absolutely critical that values represent the risk being underwritten in order to assure the industry's long-term financial stability," he added.

The enormous industry losses inflicted by this year's hurricane season "have created a new benchmark for what is possible with catastrophic exposures," he said. "Such industry losses demonstrate the importance of adequate ITV calculations: underwriters cannot set sound technical prices if they do not receive accurate values for the properties they insure."

Smith said that industry experts often cite technical pricing, terms and conditions, deductibles, limits and catastrophe accumulations as the vital components of underwriting. "Unfortunately, adequate ITV is often not a priority, despite the fact that it has a significant influence on a company's profits."

He emphasized that the problem of inadequate ITV is not only an issue for insurers; it also can be detrimental for homeowners who are underinsured.

"Many insurers of homeowners continue to offer 'Guaranteed Replacement Cost' coverage -- but generally it is only provided in their 'preferred' programs and it is limited to a modest amount (usually 20% to 25%) above the actual amount of coverage purchased," Smith continued.

Although inadequate ITV is a greater issue in softer markets, Smith said it's important that insurers develop consistent contract language that encourages proper reporting of ITV in any part of the insurance cycle.

There are too few incentives for agents and brokers to report adequate ITV, he said. "Higher insurance values mean higher premiums; agents and brokers are obviously looking to keep premiums as low as possible, which can affect the assessment of ITV. Further, few commercial insurance contracts contain penalties for the reporting of inadequate values."

He noted that insurers also "play a role in the problem when they renew a program at expiring values, rather than annually trending the values and then re-appraising them every five to seven years."

To download the white paper, visit http://www.geinsurancesolutions.com/erccorporate/documents/home/ insurance_to_value.pdf. (Due to its length, this URL may need to be copied/pasted into your Internet browser's address field. Remove the extra space if one exists.)

GE Insurance Solutions is a group of companies that protects people, property and reputations. With more than $48 billion in combined assets, GE Insurance Solutions is one of the world's leading providers of commercial insurance, reinsurance and risk management services. More information is available at www.geinsurancesolutions.com.