Businesses worldwide are experiencing the effects of the highest inflation rate in a generation. WA Local governments need to consider inflationary pressures when valuing both their property and motor assets so that they can be confident that if disaster strikes, your protection will be adequate to appropriately respond.

LGIS members need to consider the actual cost (refer to our protection policy wording) of the following:

• A building  the rebuilding thereof or in the case of property other than a building, the replacement thereof by similar property in either case in a condition equal to, but not better or more extensive than, its condition when new.
• A vehicle; the market value which is based on what similar cars in the same condition are worth, as well as the average price if you were to replace that vehicle today.

In Australia, inflation is growing at its fastest pace in 20 years, the cost of living and increases in construction costs are front page news. The Australian Bureau of Statistics (ABS) has reported that annual inflation had surged to 7.3% in Q3 2022 from 6.1% in Q2 2022 and 5.1% in Q1 2022, surpassing market estimates.

Unfortunately, the LGIS mutual indemnity scheme is not immune to inflation. Market movements can significantly impact the tangible assets and business interruption values declared within scheme protections.

Valuations have become a focal point, driven by concerns about declared values adequately capturing market movements as well as loss experiences in cases where loss amounts were well above reported values. 

Inflationary factors such as changes in construction costs, increase in labour charges, supply issues and increased equipment costs all have a material impact on the values that are required to be declared.

During these times, we are seeing continued strength for damaged and salvaged vehicles. This is causing salvage values to rise, which is impacting the overall amount of vehicles that are deemed a total loss that may have been borderline in previous years. These salvage figures are used in the assessors calculations when determining if the vehicle is a write off, or not.

It is crucial that members understand the impact inflation may have on their scheme programs.

Impact of inflation on declared asset values

If you have not reviewed and updated values, this could result in your values being inaccurate and impacting you in a claims event.

Common mistakes to avoid when declaring asset values

• Using last years declared values or simply increasing/decreasing values by a percentage.
• Declaring assets at market or fair value for building and contents
• Not assessing all asset classes, for example ignoring fit out or contents.
• Declaring the value of what you would prefer to replace the asset with.
• Relying on advice from an in-house accountant or engineer.
• Asking the bank, builder, architect or real estate agent to provide values.
• Insufficient consideration of regulatory and compliance codes.
• In the case of acquisitions, assuming that the values supplied are accurate.

With continuing changes in material costs, labour shortages and supply issues there has been a significant amount of discussion regarding changes in construction costs. This has seen varied and diverse information regarding changes in costs over the last 18 months. Each industry has been affected differently. Whilst you may consider increasing declared values with general indices such as Consumer Price Index (CPI), given the policy responds to your specific assets, this could expose you to the unnecessary risk of over or underestimating values.

How you can respond

When calculating your values, it's important to consider what the impact of COVID-19 was on the base financial data you are using. Ask yourself questions like

• Is what I have seen and incorporated in my base data likely to be repeated in the renewal period under consideration?
• Do I need to increase my values given demand?
• How do I factor in the likely increase in the cost of labour?'

We recommend that you update the declared values of your assets where needed to account for increases caused by inflation, or to capture other changes to your values since you last reported them.

LGIS members should discuss an appropriate approach with their account manager.