1. Wisconsin Association of Mutual Insurance Companies April 19, 2017

2. Today’s Discussion Construction Costs in Wisconsin
Residential Building Cost Trends
Importance of Insurance to Value
What Are You Insuring to?
Determining Replacement Cost on the Home Inspected
Questions and Answers

3. Wisconsin Inflation Factors
Annual inflation factors for residential construction show an increase of 4.6% for 2017.
This is the state average and can vary somewhat based on zip code.
Countrywide the average is 4.5%

4. What’s Causing the Changes?
The biggest factor is a labor shortage.
Construction Related Cost Increases:
Labor up 2.4%
Glass up 3.0%
Concrete up 3.3%
Lumber up 4.2%
Steel up 3.0%
Gypsum up 3.2%
Millwork up 2.3%
Paint up 1.1%

5. What’s Causing the Changes?
Construction Related Cost Decreases:
Asphalt down 24.0%
Fuel down 3.1%

6. Residential Building Cost Trends
Survey data from the National Association of Home Builders (NAHB) shows that a key factor complicating builders' efforts to scale up their operations is a labor shortage within the industry that is putting upward pressure on construction costs. According to the NAHB, this is more of an issue with subcontractors than workers who are employed directly. Builders use, on average, 22 subcontractors for each new home*. As a predictable consequence, costs are rising faster for builders that rely on more subcontractors, although labor costs are up across the board.
The U.S. construction sector is having difficulty keeping up with demand for homes for a variety of reasons. If a greater percentage of existing homes are rented out, prospective buyers might have trouble finding available houses that they can afford. This could push up values of existing stock and put more pressure on new home builders.
*NAHB housingeconomics.com

7. Residential Building Cost Trends
62 percent of firms building new single-family homes report that they are doing more than 15 percent of their projects green. By 2018, that percentage increases to 84 percent. (McGraw Hill Construction Company)
Areas with the greatest per capita investment in green buildings in the U.S. for 2014 were:
Washington, D.C.
Hawaii
Illinois
California
Colorado
Georgia
Maryland
Minnesota
Virginia
Arizona
Massachusetts
New York

8. Residential Building Cost Trends
Number of new home permits by state.
Wisconsin 14.6k
© 2014 Coyne College. All rights reserved.

9. Residential Building Cost Trends
© 2014 Coyne College. All rights reserved.

10. Residential Building Cost Trends
Links to additional interesting information and articles on residential construction:
flat/
new-homes
homes/?icid=maing- grid7%7Caim%7Cdl18%7Csec1_lnk3%26pLid%3D
declined-50-between-2007-and- 2012/?utm_source=newsletter&utm_medium= &utm_campaign=eye 91615
single-family-home/

11. Importance of Insurance to Value
Insurance is designed to restore consumers to financial wholeness when a loss occurs. While many policyholders purchase low limits of coverage to save money, insurance professionals should encourage their customers to insure their property to value.
Why?
To protect the insured from unexpected, out-of-pocket expenses due to underinsurance at the time the customer is most in need.
Think Value, Not Cost
Prevent Future Disputes
Premium Adequacy
Satisfactory Loss Settlements for Customers, Agents and Underwriters
Increased Customer Satisfaction
Increased Customer Retention
More Referrals
Revenue Growth and Increased Profits

12. Why Should You Care? “70% OF THE BUSINESS IS 30% UNDERINSURED”
CAN THAT BE TRUE?

13. What is the cost? What is the opportunity?
Example: Home in Wisconsin
January 1, 2014 Replacement Value = $100,000
No Value Updates in 2015 or 2016
January 1, 2017 Replacement Value = $108,784
This home is underinsured by almost 9%

14. What is the cost? What is the opportunity?
Example: Home in Wisconsin
January 1, 2014 Replacement Value = $100,000 but was insured for $85,000
No Value Updates in 2015 or 2016
January 1, 2017 Replacement Value = $108,784 but still insured for $85,000
This home is underinsured by 28%

15. What is the cost? What is the opportunity?
If true, what is the cost to the Homeowner?
Wisconsin Homeowner #1 Total Loss
Insured Value $ 85,000
Actual Total Loss $108,784
Missed Value
from the Loss $ 23,784
Wisconsin Homeowner #2
Partial Loss w/80% Coinsurance
Kitchen Fire Loss $ 20,000
Coinsurance Application ($4,400)
($85k/$109k = 78% x
$20k = $15,600)
Deductible ($ 500)
Paid Loss $ 15,100
Homeowner Paid $ 4,900

16. What is the cost? What is the opportunity?
This “Lucky” Wisconsin Homeowner #3 Has a 120% Coverage A Loss Limit Insured Value $ 85, % Loss Limit $102,000 Total Loss $108,784 Homeowner-Covered Portion of the Loss $ 6,784 Deductible $ 500 Out-of-Pocket Cost $ 7,284

17. WHAT IS THE AGENT’S COST?
What is the cost?
What is the opportunity?
WHAT IS THE AGENT’S COST?
Annual Commission Income
Additional Volume and Profit Related “Bonus” $
Those Three Wisconsin Customers
… and their friends and family, and the people they talk to … (agent now has a negative referral network to overcome, which also extends to the insurance companies that this agent represents.)
Increased Cost of E&O Coverage

18. The Basic Principal of Insurance to Value
Home A
Coverage $150,000
Premium $375.00
Insured for 5 years
Total Earned Premium $1,875.00
Home B
Coverage $187,500
Premium $468.75
Insured for 5 years
Total Earned Premium $2,343.75
Home A and Home B are the same size, have the same features and have the same replacement cost. Home A is insured for 80% of the full replacement value and Home B 100% of the full replacement value.
Most losses are small loses and water damage is the most frequent cause of loss. If each home has a $2,500 covered loss and each policy has a $500 deductible:
After 5 years, insuring Home A results in a gross loss of $ and insuring Home B results in a gross profit of $
The total gross cost of underinsurance is $

19. What Are You Insuring To?
Are you insuring to Market Value or Replacement Cost?
Replacement Cost is what it will cost to rebuild the home with materials of like or similar quality, in the shortest amount of time and with a builder who is basically building the home as a custom-built house.
Market Value is the price at which a particular house, in its current condition, will sell for within 30 to 90 days. The only real measure of market value is what a specific house actually sells for.

20. What Are You Insuring To?
Assessed Value is the dollar value assigned to a property for purposes of calculating applicable property taxes by the corresponding government municipality. This value is determined by taking comparable home sales and inspections into consideration. In general, it tends to be lower than the appraised fair market value of a property.
New construction costs may be a closer indication of insurance replacement cost, but not always. Did your client save from economies of scale (production builder), or discounts / incentives? Did your client contribute to the construction process to save costs?

21. What is the cost? What is the opportunity?
The housing market is still down, but is coming back. Home values are still down from their highs.
Replacement costs have risen. Homes use materials and labor. Materials are affected by world issues and labor is affected by local issues.

22. What is the cost? What is the opportunity?
While market prices have dropped, actual replacement costs have not.
There are areas of the country that have seen an increase in market values since the 2006 highs.
While the headlines tell a story of “all” homes losing value, the actual results are not the same for every home.
Materials and labor move to the places that use them and prices tend to move up over time for market-driven items like replacement cost.
Add in flood losses, hail losses and other catastrophes, and prices will jump even more in some areas.

23. Your Opportunity NOW THAT WE KNOW THE COST… WHAT IS THE OPPORTUNITY?
Value Adequacy = Premium Adequacy
= Better Base Rates
= Satisfactory Loss Settlements for
Customers, Agents and Underwriters
= Increased Customer Satisfaction
= Increased Customer Retention
= More Referrals = Increased Agent Production
= Revenue Growth and Increased Profits
…for the insurance company and the agents

24. 2100 Square Foot Ranch
What Is The Cost Per Square Foot To Replace A 2100 Square Foot Ranch That Was Built In 1985 In Your Area?

25. Basic Ranch $116 Per Square Foot Replacement Cost Type: Full
Replacement Cost Analysis:
Replacement Cost (Rounded)*: $244,000
Replacement Cost Type: Full
Coverage A Amount $: $260,000
Origin of Coverage A: Previous Coverage
ITV Percentage: 107%
Gross Square Footage: 4200
Replacement Cost Price/Sq.Ft.**: $58.10
Coverage A Price/Sq.Ft.**: $61.90
Estimator Date: 2/13/2017
*See Disclaimer Below ** Based on Gross Sq.Ft.
Area Year Built Sq Ft
Living Area
Crawl Space
Structure Profile:
Year Built:
Renovations: No
Historic Registry: No
Architectural Style: Ranch
Type of Construction: Framing, Wood
Quality of Construction: Modest / Fair
Physical Shape: rectangular
Primary Exterior: Vinyl Siding
Primary Roof Covering: Asphalt Shingle
Description of Locale: Suburban

26. Custom Ranch $312 Per Square Foot Replacement Cost Analysis:
Replacement Cost (Rounded)*: $655,000
Replacement Cost Type: Full
Coverage A Amount $: $260,000
Origin of Coverage A: Previous Coverage
ITV Percentage: 40%
Gross Square Footage: 4200
Replacement Cost Price/Sq.Ft.**: $155.95
Coverage A Price/Sq.Ft.**: $61.90
Estimator Date: 2/13/2017
*See Disclaimer Below ** Based on Gross Sq.Ft.
Area Year Built Sq Ft
Living Area
Basement, Finished Walk Out
Structure Profile:
Year Built: 1985
Renovations: No
Historic Registry: No
Architectural Style: Ranch
Type of Construction: Framing, Wood
Quality of Construction: Expensive / Custom
Physical Shape: Rectangular With Angled Wing
Primary Exterior: Glass Panels
Primary Roof Covering: Clay Tile
Description of Locale: Suburban
$312 Per Square Foot

27. Final ITV Considerations
Calculate a replacement value at the time of policy issuance. Verify the structure’s size and features with your client for the most accurate valuation.
Check in annually to ensure the information remains the same or if there have been any additions, updates or improvements?
Apply inflation annually.
Consider recalculation after a few years to reconcile the renewal inflation figures with the valuation system’s inflation for the specific structure.
Remember: Raising the deductible is the best way of keeping the premium affordable without reducing the homeowners protection.

28. Questions?

29. Contact Information
Debbie Wagner Executive Vice President of Sales Customer Support –

30. Home to be Inspected