Calculating Current Replacement Values – Insurable Value Method
Updated: Sep 14, 2020
This post is part of a series that is focusing on Current Replacement Value (CRV) and its importance in allowing organizations to benchmark their portfolios using Facility Condition Indices (FCIs).
In the first post of the series we focused on the importance of being consistent in developing the CRVs for your buildings. This post, and the next few, will each focus on a single, common methodology that some organizations use to calculate CRV.
In order to secure an insurance policy on any building, the insurer will ask for an Insurable Value (IV) for a building. Basically, the insurance company is looking for a valuation of the building that it will pay out in the event of complete loss associated with a policy.
Nearly every organization has IV calculations for all of their buildings (as well as other insurable assets). This readily available data, which is already being used in other areas of the business, can be an easy to use baseline for CRVs. However, there are a few key things that must be clearly understood before IV should be considered as the basis for CRVs.
In my experience, organizations have often been using the same IVs for a very long time, sometime for decades (adjusted annually for inflation). As such, the original method used to calculate the IVs may not be known. We recommend that before you use IVs as CRVs that you have a clear understanding of the original methodology used to calculate the IVs.
IVs are generally developed by integrating the building elements with an industry standard cost guideline such as Marshall and Swift. However, if the building was constructed many years ago, it may not be clear how the IVs was originally calculated.
Additionally, for organizations that have buildings that were built over many years or decades, it is important that the methodology used to develop the IVs for the buildings built over time is consistent. If the methodology changes over time then inconsistency can creep into the process and create issues associated with comparing FCIs.
For several of our clients, particularly those that have significant diversity in building type/use, we have used IV as the CRVs. However, we always recommend that some secondary cross-checking is done to make sure that there is sufficient consistency in the values. This can include comparing cost per square footage for buildings of a similar type, or comparing with actual construction costs of similar, recently constructed buildings.
Our next post will look at the Sum of the Parts Method.