State Office of Risk Management 1 Insurance Appraisals – Why Bother?

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

1

Insurance Appraisals – Why Bother?

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

2

Changes in Underwriting

Improved underwriting discipline dictated by the markets Increased emphasis on a consistent, disciplined approach to underwriting:• Exposure data analysis (valuation and COPE data)• Loss experience analysis

Increased focus on geography Appraisal requirements for insured properties Ever-changing catastrophe models affect expected loss predictions (PML and AAL) Carriers are requiring more data and many standard markets are cutting back capacity,

especially in high hazard areas.

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

3

Questions to Ask Yourself

Are you confident that your statement of values accurately reports all of your insurable property?

Have you kept pace with the change in assets within your facilities? Do you know where your properties’ data came from? How well was your statement of values received when last marketed? Did you receive

pushback from underwriters?

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

4

Cost Trends

1986-2003 (2% inflation/increases per year) Significant construction inflation in 2004 (10.5%) Slowing from 2005-2007 Commodities caused drastic increases in 2008 Prices fell back with economy in 2009 Inflation stabilized in 2010-2011 Most recent 12 months: 3% Outlook for remainder of 2014: 2% 25% - 30% inflation in seven years

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

5

COPE Data Defined

Underwriters are interested in receiving more than just a valuation, they also want COPE data:• Construction (frame, brick, masonry, masonry veneer, etc.)• Occupancy (how the building is being used)• Protection (quality of the responding fire department, adequacy of water pressure

& water supply, the presence or absence of smoke alarms, etc.)• Exposure (risks of loss posed by neighboring property or the surrounding area --

takes into consideration what is located near the property, such as an office building, a subdivision or a fireworks factory)

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

6

Why is COPE Data Important?

Used in catastrophe modeling programs• Applied to individual insureds and insurance company property portfolios• Uses historical data‐ Financial‐ Meteorological‐ Engineering

• Estimates losses for catastrophic (CAT) events• Adopted by insurers and rating agencies in CAT management and financial analysis

models• Defaults to worst-case scenario if data is not available

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

7

CAT Risk Modeling: True Impacts

The entire insurance industry is impacted by CAT Modeling, no matter which software package is used:

• RMS• AIR• EQECAT• Proprietary/blended models

Models are constantly updated

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

8

How do Insurance Companies use CAT Modeling?

The goal of CAT modeling is to lend consistency to the overall cost of risk Manage aggregate exposure over their entire portfolio of risk Purchase re-insurance protection Underwrite individual risks (impact on the overall portfolio of risk) Charge the appropriate premium for the risk

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

9

How do Insureds use CAT Modeling?

See how the insurance industry views your risk Have an idea of your expected losses and/or your Probable Maximum Loss (PML) Identify high hazard locations Aid in determining/purchasing “adequate” limits

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

10

Primary COPE Data – most crucial information

Occupancy type Number of Stories Class of construction Year of construction

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

11

Secondary COPE Data

More detailed structural / location specific data elements, specific to• Windstorm/Hurricane• Earthquake

Primary COPE data must be reported for the Secondary factors to apply and matter The concern relates to maintenance of the building envelope during an event to

protect the contents:• How solid are the walls?• How strong is the roof & covering?• How susceptible to peril are the contents?

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

12

Benefits of Accurate COPE Data

CAT modeling for hurricanes and earthquakes has become an essential resource for all parties in the property insurance marketplace

Proper inclusion of data has significant impact on modeling results Detailed info about a building’s construction and usage provide a predictive image of

how the building will react in the event of a catastrophe Accurate data can help the underwriter, broker and insured better understand true

exposures This knowledge of expected losses helps insureds and insurers set acceptable program

structure and sublimits Better data leads to better decisions

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

13

Actual Renewal Results

Additional underwriting data has produced significant reductions in the PML and AAL estimates and lower premiums for many accounts

Additional underwriting data and has made it easier to buy more insurance coverage for many accounts

Additional underwriting data can make accounts more attractive to insurance carriers – increased competition can yield better results

Increased data can also help significantly post-loss: Eliminates argument on building valuations or condition of building

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

14

Insurance Appraisal of Buildings – Methodology – How it’s done

Component-Based Appraisal Methodology Conduct an on-site inspection and appraisal of every structure Measure dimensions/perimeter Review as-built plans Obtain GPS coordinates Gather descriptive and locational details Determine construction components Review building services, interior and exterior finishes, etc. Photograph each building Develop replacement cost using local construction cost resources Report values and COPE (primary and secondary) data by building

Unique Structures Universities (stadiums, libraries, hospitals, research facilities, historically significant) Water and Wastewater Treatment Plants Airport Facilities Historic Properties

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

15

Primary and Secondary Windstorm Data that is Collected

Primary COPE Data Occupancy Address Class of construction Year of construction Square feet of space Number of stories Average story height Wall construction Roof construction Heating system Cooling system Fire alarm Sprinklers Entry alarm GPS coordinates

Secondary COPE Data Construction quality Roof covering and geometry Roof age/condition Roof anchor and equipment bracing Basement Appurtenant structures Cladding type Roof sheeting attachment Frame/foundation attachment Ground-level equipment Opening protection Flashing and coping quality Content grade Flood zone determination RMS/AIR-specific construction codes RMS/AIR-specific occupancy codes

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

16

Historic Structures

The most visible differences between historical and modern structures are the interior and exterior finishes:

Floors

Walls

Ceilings

Windows

Doors

Special architectural features

Inspection and appraisal process is expanded for historical structures to identify and record the nature of interior and exterior finishes during the inspection process for consideration of the related costs during the final appraisal process.

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

17

Valuation Solutions - Contents

Appraisal Programs‐ Contents/personal property valued by modeling approach• Recommended when personal property is of much less significant value than

real property• Based on appraisal company’s prior full surveys of similar occupancies• $/SF used and adjusted when necessary by appraisal staff• Typical for public-sector occupancies

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

18

Valuation Solutions - Contents

Appraisal Programs‐ Detailed asset listing by comprehensive site inspection• Recommended for capital-intensive manufacturing plants• Inspected and inventoried‐ Asset number, description, model number, serial number and manufacturer

• Predetermined equipment listing cut-off (greater than $100,000 suggested)• Logical production lines and single assets with replacement cost greater than

$100,000 listed• Asset below this cost grouped with like kind assets• Assets repriced using a variety of sources• Values reported by floor by building• Typical for HPR (highly protected risk) occupancies

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

19

Sample Appraisal Report

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

20

How to Order an Appraisal

Within the SORM program, discuss with Michelle Tooley and Chris Connelly/AJG to identify the structures to be appraised• Will realize volume discount pricing that has been negotiated between

SORM/AJG/American Appraisal Outside the SORM program, contact Lori Flemming to discuss appraisal needs at your

institution. Appraisal fees will be somewhat higher given the “one-off” nature request.

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

21

How to Prepare for an Appraisal

Contact your departments to alert them to our site visit Provide name/contact details of department liaisons

• preferably plant operations or maintenance personnel who have knowledge of the buildings’ history

If blueprints or CADs are available, it would be useful for our staff to have access to review prior to inspection

Provide identification/badge or letter to let others know we have permission to be on site

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

22

Benefits of Insurance Appraisals through SORM

Determine the adequacy of insurance coverage Improve risk management Create confidence in the accuracy of values Eliminate surprises at the time of loss Ensure preferential underwriting treatment Create a basis for preparation of “proof of loss” for clients Substantial discounts by working with American Appraisal within the SORM program

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

23

American Appraisal’s Insurance Appraisal Practice

Established in 1896 to provide independent property appraisals for use in adjustments and settlements between insurance companies and property owners

Full-time, permanent employees (no subcontractors)

Serve numerous public entities (State govts, higher ed, healthcare)

Dedicated Public Entity Practice Group

Inspect/appraise 30,000+ buildings annually for insurance purposes

Regional access to American Appraisal’s global reach

Established

Full-time

Diverse

Dedicated

Global

Accessible

Text Here

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

24

Professional Qualifications

Lori is a Managing Director of business development for American Appraisal in the southeast United States. She has served in her current position since 1992. Prior to joining American Appraisal, Lori spent five years as an officer in the United States Air Force, Space Command.

Education University of North Carolina at Chapel Hill, Bachelor of Arts - Psychology Webster University, Colorado Springs, CO, Master of Arts - Satellite/Space Systems

Management Certification - SAPs Finance/Control Module

Professional Affiliations Risk and Insurance Management Society (RIMS) University Risk Management and Insurance Association (URMIA) Public Risk and Insurance Managers Association (PRIMA)

Lori C. FlemmingManaging Director

Contact InformationPhone: +1 704 953 [email protected]

Sta

te O

ffic

e o

f R

isk

Man

agem

ent

25

We look forward to working with you.

Thank you for choosingAmerican Appraisal.