Projecting Insurance Expenses

When projecting insurance costs for properties, we have noticed misconceptions by many analysts which in many cases underestimate the appropriate insurance expense. We interviewed some insurance brokers for this article to get their insight.

The cost of insurance is not reflective of the market value of a property but of the replacement cost.  A 20,000 square-foot, three-year-old, industrial building may have a market value of $2,000,000 while a sixty-year-old industrial building of similar size might have a market value of $650,000.  The replacement cost, however, for the two properties might be very similar.

Insurance companies look at several factors in estimating insurance costs. They rate a masonry-constructed building more favorably than a frame or partial-frame building.  The presence of sprinklers would lower the projected insurance cost.  The age of the electrical system and how recently the property has been renovated are important factors.  A building renovated within the past five years will have lower insurance costs than a building that has not been renovated.  Insurance agents also look at crime levels in the area as well as the quality of the management.

Leased properties often report the insurance expenses they pay, which is usually the best indicator to run with.  Owner-occupied properties tend to provide us with far less expense data, and we rely on our expense surveys. We recently sent our clients our over/under 50,000 square-foot expense comparables analysis for various property types.  An older building with no recent renovations could be well above the median or average insurance cost.  Likewise, a brand-new building might be below the median or average insurance expense. Do not just assume the median or average insurance expense for any property.