“We are likely to see significantly higher rebuild costs in Australia”

“We are likely to see significantly higher rebuild costs in Australia” | Insurance Business

“We are likely to see significantly higher rebuild costs in Australia”

A lot has been said about the hard insurance market and how insurers in Australia have been reducing capacity for higher risks, but the spotlight has not been as bright when it comes to rebuild costs and sums insured. Here, valuation expert Andrew Slevin (pictured) points to the rising cost of materials and contractors, and how the increase and a host of other issues are affecting insurance.

“With the globalised nature of supply chains, Australia’s market will continue to be impacted by changes to commodity prices that will have a direct impact on current replacement and rebuild costs for infrastructure and real estate,” Slevin, chief executive of global asset valuation services provider John Foord, told Insurance Business.

“While disruption to logistics and supply chains has already driven prices of commodities to levels not seen for several years, we expect a broad basket of commodities to benefit further from global public infrastructure spending plans, including cement, steel, copper, zinc, lead, and other metals.”

Steel prices, according to the CEO, are now anywhere from 70% to 100% higher than they were a year ago. Slevin attributed the rocketing prices to delays on supply coming back online following the coronavirus-induced shutdowns of blast furnaces and production facilities.  

“In due course,” he said, “commodity and material prices are likely to stabilise, once capacity that was previously idled or production is brought back on stream, but for some sectors this could take months or years. At the same time, large infrastructure projects will demand expertise from consultants, engineers, and contractors, meaning increased competition for labour and specialist skills.”

The John Foord chief, who also cited higher shipping costs, highlighted that rates for the best consultants are expected to go up given that many of these skills are not easily scalable. And with the Australian government recently committing $15.2 billion into infrastructure over a 10-year period, Slevin believes large amounts of resources will be tied up and make it more expensive for the private sector to undertake large projects in areas including property. 

“As a company that advises clients on rebuild costs and on reinstatement, there’s a real challenge around whether companies have really factored changes into their thinking,” he noted. “If Australian businesses are benchmarking reinstatement or construction costs against past prices, in an environment where some commodities have doubled over the past six months, they may have an inaccurate view on current reinstatement costs. 

“If they suffer a loss, not only will they likely face challenges from insurers on the sums insured, but they will also find replacing the facilities and restarting business could take much longer than before. With global commodity prices at levels not seen for some time, and in some case up over 70% year on year, we are likely to see significantly higher rebuild costs in Australia than when policies were signed pre-pandemic, exposing current policyholders to underinsurance risk.”

For Slevin’s camp – which specialises in the valuation of industrial, commercial, and residential buildings, as well as plant & equipment and civil works – the message is clear; that is, that asset owners, financiers, brokers, and insurers should see to it that sums insured and expected reinstatement periods for tangible assets are constantly reviewed and updated.

“Doing so will help to recognise the systemic effects of COVID on supply chains and prices,” said the CEO, “and will reduce the potential for under- and over-insurance should a claim arise.”

Additionally, amid the current market where insurers are seeking to limit exposure and future losses, Slevin thinks asset owners will be under significant pressure to provide an “awful lot more” accurate and justified information on their properties going forward to ensure that they can get coverage.

“Certainly,” he told Insurance Business, “there’s a significant change in attitude around the insurance companies wanting more information to be able to make better risk decisions.”