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Extreme Weather, Inflation Create Challenging Property Market

February 18, 2022 Janina Flores

Aerial view of school campus

One year after Winter Storm Uri released its grip on Texas, we have a clear picture of the financial fallout: $23 billion in insured losses, plus another $200 billion in economic losses. The increased frequency of natural disasters such as Uri in recent years has fueled what insurance professionals call a hard property market.

In a hard market, demand increases and the number of risk pools, insurance carriers, and reinsurers—collectively called coverage providers—serving the market decreases. 

Meanwhile, rising expenses associated with labor and material sparked a double-digit increase in construction costs in 2021. With no changes to your property schedule, property values will increase, and so will the amount you pay for coverage. It all adds up to a challenging property coverage market for school districts when it comes time to go out to bid or renew.

Data drives informed underwriting decisions

In a hard market, providers gather as much information as possible to get a complete picture of your risk profile. Catastrophe (CAT) modeling and property appraisals give providers critical data that helps them make informed underwriting decisions. 

Developed in the 1980s, CAT modeling is a risk management tool used to quantify expected claims costs that come with weather events. Detailed information collected during property appraisals fuels CAT models and impacts your rates, coverage, terms, and conditions. 

The value of property appraisals

A property appraisal is a thorough physical examination of physical structures such as buildings, their contents, and certain land improvements. The goal is to determine the cost of replacing the current building to its current structure, footprint, and condition with like kind and quality materials.

The Fund works with Kroll Reporting Solutions to provide property appraisals to our members. (Note: Kroll Reporting Solutions was formerly known as Duff & Phelps.)

Why appraisals?

  • Determine whether your coverage is adequate
  • Identify district locations that need to be added or removed from coverage
  • Report construction, occupancy, square footage, protection, exposure (COPE), and other features on properties, which is helpful in the underwriting process and for CAT modeling
  • Calculate the replacement value of your property

Impact of inflation

The industry standard for calculating replacement cost is to use models that quantify the amount of labor and materials necessary to reconstruct a building, in its entirety, at a single point in time, according to Bradley Schulz, managing director of fixed asset management insurance solutions at Kroll.

Shultz says Kroll’s models pinpoint local labor costs by ZIP code, as well as the costs of plywood, lumber, concrete, and other materials. Recent models uncover the impact of inflation on construction costs.

“We’re seeing significant cost increases during the third and fourth quarters of 2021,” said Shultz. “We anticipate those increases will be reflected in our valuation models over time.”

Construction cost indices 2017 2018 2019 2020 2021
Engineering News-Record – Building Cost Index 3.30% 3.30% 1.74% 3.96%

12.15% through Q3

FM Global – US Industrial Buildings Average 1.20% 5.20% 1.73% 1.42% 18.4% (through Q4)
RSMeans – 30-City Average 4.00% 5.50% 2.05% 1.71% 11.88% (through Q3)
Marshall & Swift, US Average 2.7% to 3.7% 3.2% to 6.0% 0.0% to 1.3% 3.0% to 6.1% 12.0% to 18.4% (through Q3)

Data supplied by Kroll Reporting Solutions

Shultz says history suggests construction costs are on an upward trend that won’t likely reverse course, at least anytime soon.

“The annual rate of increase may slow, but when labor and material costs go up, they typically don’t come down dramatically.” Bradley Schulz, managing director of fixed asset management insurance solutions at Kroll Reporting Solutions

That means even if you don’t add facilities or equipment to your coverage, the replacement cost of your existing property has increased. When property costs more to replace, it costs more to insure, which means your coverage costs might also rise.

Navigate the property market

The Fund is here to support our members through all property market conditions. The more informed you are, the better prepared you will be to navigate the hard market. We encourage you to explore the other articles in our Fund 101 series:

If you have questions about your coverage or your renewal, your TASB marketing consultant is ready to help.

About the author

TASB Risk Management Services Director of Risk Solutions Janina Flores leads a team of professionals who provide a variety of services to Fund members to help prevent losses and be aware of and prepared for emerging risks.

Tagged: "disaster preparedness", "emergency preparedness", "preventative maintenance"