Property managers have a great deal of responsibility towards their clients and residents. One of these key responsibilities is to make sure each blocks of flats under management is insured and appropriately insured, which is why managing agents use specialist brokers to procure buildings and terrorism cover.
Given that buildings insurance premiums are primarily calculated from the property’s rebuild cost, otherwise known as the declared value (DV), then it follows that determining an accurate DV is vital.
To do this, you need to commission a reinstatement cost assessment (RCA). The RICS recommends a “major review” is done every three years with annual adjustments made “to reflect inflationary effects”. In practice, this means an RCA carried out by qualified person (usually a surveyor), in person, every three years, with a desktop review annually.
Over the last couple of years, we have seen the rise in popularity of desktop RCAs to replace a physical inspection. There is only one real driver behind this: to save money.
But does a desktop assessment actually save the freeholder/leaseholders money?
We looked at how a desktop assessment is often done and concluded that they tend to err on the side of caution because, understandably, assumptions need to be made when you have not visited the building. We noted that our competitors were generally using higher rates for desktop surveys. They included for plant that did not exist, and upscale finishes that were not there. The measurements from Google Earth were inaccurately taken. Too many desktop RCAs have been carried out without plans leading to a reliance on educated guesses. More besides.
What does this all mean? Well, for non-listed buildings of straightforward construction, we are seeing inflated DVs, which ultimately means the leaseholders are paying more for the insurance premium that is necessary. They may have saved a few hundred pounds in having a desktop in the first place but at least that amount has been added back in due to the bloated rebuild cost!
And for more complex buildings – period properties in conservation areas, listed buildings, and those where the demised areas are not at all clear from Google – these can be grossly undervalued or overvalued. Thus the leaseholders are either paying too much for the insurance premium or they own an apartment in an under-insured block, the latter being potentially catastrophic in the event of a claim.
Desktop valuers will be the first to admit that an in-person survey is preferable for an accurate assessment. This is why they caveat their reports – take a look at the small print.
For most buildings, any savings made by commissioning a desktop assessment versus a full inspection are likely to be erased – and surpassed – due to the higher insurance premium resulting from the unnecessarily inflated DV.
A worked example:
|Exc. VAT and IPT||Desktop RCA|| |
RCA with physical inspection
|Declared Value||£9m|| |
|Insurance Premium: say £150 per £100k of cover||£13,500|| |
|Total cost to client||£13,875|| |
Is there ever a good reason to do a desktop assessment?
Once a full RCA has been carried out and the surveyor has detailed information about the building, then yes, a desktop review annually is recommended and easily done (assuming no significant changes to the building).
We carry out desktop updates ahead of insurance renewal dates at the end of the first and second years where no significant changes have been made to the building in question. Yearly updates help property managers to budget more accurately and avoid potentially large variances every three years. Index linking of the DV is unlikely to be as precise as the surveyor reviewing their own figures.
If you’re insuring hundreds of near identical buildings, you might elect to have your surveyor carry out physical on-site inspections on a couple of examples and then ‘desktop’ the rest using the full RCAs to derive a functional unit rate. This will be an uncommon occurrence for most property managers.
Are desktop RCAs a false economy? Our view is yes. We would go further and say they are also very risky.
James Paul MRICS is director EK Reinstatement Cost Assessments
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