Feature Story:
Tracking Critical Industry Trends
Current, comprehensive data is key to navigating tumultuous economy
by Mike Fulton, Assistant Vice President, Xactware
During the past few years, changes in construction rates, claim trends, and property market values have experienced shifts that require property insurance professionals to reevaluate long-standing assumptions about calculated risk levels. Access to reliable costs of labor, material, and equipment, as well as real-time information on industry trends can help insurers effectively navigate the challenging economy.
It’s difficult for property insurance professionals to monitor labor, material, and equipment prices on their own, especially considering all the other variables they need to track. Thousands of construction rates can influence the cost of a loss estimate, and each of those rates can change quickly. However, advanced technology and detailed research offer a robust solution and allow property professionals to monitor construction costs that have a significant impact on decisions they make.
ISO subsidiary Xactware Solutions continually surveys labor, material, and equipment providers across the nation and analyzes millions of claim estimates each year to provide property insurance decision makers with comprehensive year-end reports and real-time analytical tools that track critical industry trends. Those valuable resources can help guide decision making, allow for faster responses to developing trends, and enhance policyholder service.
Market Value vs. Cost to Rebuild
The difference between a home’s market value and the cost to rebuild has become an especially critical issue in the current economic climate. Many policyholders believe their homes should have insurance based on the perceived market value rather than on the cost to rebuild. While a home’s market value, which is inclusive of land, is usually higher than its cost to rebuild, many homes across the nation have lost substantial equity over the past few years. The National Association of Realtors reports the U.S. median sales price of a single-family home has dropped more than 12.62 percent since 2008 and increased 3.5 percent between January and December 2009. Meanwhile, reconstruction costs increased 5.06 percent and 0.93 percent during the same time frames.
Those contrasting trends have increased many policyholders’ exposure to underinsurance issues in regions where home values have deteriorated significantly and dropped below the cost to rebuild. To help policyholders make informed coverage decisions, insurers are increasingly looking for up-to-date cost information that can help ensure replacement-cost estimates adequately cover policyholders’ probabilistic risk.
Insurance-to-Value Estimating
One of the best ways to match coverage appropriately to a home’s calculated risk is to start with the initial insurance-to-value (ITV) calculation. Insurers can use up-to-date costs gleaned from actual repair estimates, surveys, and market analysis to calculate detailed, component-based ITV estimates that they can save and use to reprice renewals with current construction costs. Insurers can also provide the detailed estimates to policyholders to explain how risk exposure has changed. Thanks to those resources, insurers can quickly update ITV calculations to reflect the latest changes in the construction industry.
25-Year Composition Shingles Trends
Rates for 25-year composition shingles over the past few years effectively illustrate how cost changes for a single product can dramatically affect risk calculations. As the economy spiraled downward and demand for construction slumped in 2008, few expected material costs to increase. But an enormous spike in crude oil prices drove up rates for many petroleum-based materials, especially composition shingles. By the end of 2008, composition shingle costs jumped 62.54 percent, and installation costs rose 21.9 percent. When oil prices dropped, many assumed petroleum-based material rates would also decrease. But by the end of 2009, composition shingle costs actually increased 6.63 percent, and installation costs rose 8.01 percent.
That dramatic spike represented a substantial increase in calculated risk because composition shingles are a common component in wind and hail losses in areas struck by hurricanes, thunderstorms, and tornadoes. If analysts were following previous years’ trends, they would have greatly underestimated losses involving composition shingles, whereas insurers using up-to-date cost information would have a reasonable baseline from which to project expected losses.
Tracking International, National, and Local Trends
The cost of composition shingles is just one of thousands of construction rates that can affect insurance repair costs. Rates for individual construction items can change quickly, and different U.S. regions can respond to market changes in varying degrees. For example, a lumber shortage in the Northwest can increase local framing rates, while prices for those materials can remain unchanged in the Southeast. Xactware’s analytical tools help property professionals spot and monitor trends and respond quickly.
Xactware tracks and publishes cost data for the United States, Canada, the United Kingdom, and Ireland. In the United States, Xactware reports on cost information collected for 430 separate markets.
For example, in the United States, Xactware tracks the year-end median cost to rebuild in various geographic regions. In 2009, Hawaii reported the highest year-end cost to rebuild, and the region comprising Vermont, New Hampshire, and Maine reported the lowest year-end cost to rebuild. Using that kind of information, property insurance risk professionals can make reasonable projections for losses in specific regions following a disaster.
Powerful Monitoring Solutions
Xactware offers a wide range of versatile products and solutions that help insurers keep a finger on the pulse of critical industry trends. The wide range of information contained in Xactware’s annual property reports and real-time industry trend reports can help experts verify calculations or alert them to areas where they need to make adjustments to respond effectively to ever-changing market conditions.
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