It might seem obtuse to say that spending money will save money but that is true for many things in property management. For example, proactive, cyclical major works to a block of flats is going to be more cost effective than attempting to patch up maintenance issues as they arise.
A building’s declared value – the cost of rebuilding it including demolition costs, professional fees, VAT and more – is needed by an insurer to work out the cost of the buildings insurance. It’s a simple sum to calculate the premium:
Declared value x rate (%) = Premium (plus insurance premium tax).
So, if your 20-unit block of flats has a declared value (DV) of £10m and the insurer is applying a rate of say 0.15%, then the buildings insurance premium will be £15,000, plus IPT at 12% = £16,800.
Whilst property managers work on keeping the rate down through proactive risk management – such as keeping on top of escape of water claims – your reinstatement cost assessor can assess the declared value to make sure it’s just right. Too low, and you risk underinsurance with potentially dire consequences. Too high, and your premium is unnecessarily elevated due to over insurance.
Taking the example above, if your client whose £10m block commissions a reinstatement cost assessment (RCA) and the DV comes out at £9m, your premium will reduce by 10%, everything else remaining equal. That’s a £1680 saving for an RCA that will likely cost a lot less than that.
Add in the cost of terrorism insurance – which is also calculated from the DV – then you are likely saving a few hundred pounds there as well.
RICS recommends a major review of the DV every three years, which is good advice that most of our clients adhere to. That doesn’t, however, preclude the importance of reviewing the DV annually. By default, the insurer will likely ‘index link’ the DV (i.e. apply an inflationary amount) once a year, unless you give the insurer a fresh RCA valuation. Generally speaking, the price of everything involved with construction and maintenance goes up year on year, however the amount that the insurer is suggesting may be over the top. How to you find out if that’s the case? By asking for an RCA.
Most purist RCA practitioners aren’t huge advocates of ‘desktop’ assessments. These are the ones done by sitting in front of the computer rather than visiting site. There is a place for such desktop assessments, and annual reviews of the DV in between major, three-year reviews, is one such place. A caveat: If you are commissioning a desktop assessment, make sure you are using the same RCA practitioner that undertook the physical site survey the last time around. This is because they will have all their calculations to hand. A desktop assessment may not be appropriate if there have been significant changes to the building which oblige a visit in person.
Diligent property managers seek several ways of saving service monies for their clients, although the mission is always to achieve great value for money. Cheapest is rarely the best – and the same applies to choosing an RCA practitioner. That said, regular RCAs – even yearly – will not only ensure you avoid underinsurance, but may also ensure the declared value is not a penny more than it ought to be. That’s value for money right there.
Daniel Lane is Associate Director and Head of RCAs at EK Reinstatement Cost Assessments
