What it means
When a company asks for property insurance, the insurer first needs to know what is at stake. The total insurable value adds up all the assets and exposures that could be damaged or lost, giving a single figure that describes the size of the risk.
The usual components are buildings, machinery and equipment, inventory (stock), furniture and fittings, and business interruption value, which is the profit and fixed costs the company would lose while it is unable to trade. Some policies also include items such as improvements to leased premises, outdoor property or valuable records.
The insurer uses the figure in several ways. It helps to set the premium, which is often a rate applied to each $100 or $1,000 of value, and it shapes the policy limits, the deductibles (the share of a loss the business pays itself) and the reinsurance (insurance bought by the insurer) that sits behind the policy.
Getting the value right is important in both directions. If the figure is too low, the business is underinsured and may recover only part of a loss, and a coinsurance clause may reduce the payment even on a small claim.
If it is too high, the company pays premium for cover it could never collect. Assets are generally valued on a replacement cost basis, meaning what it would cost to replace them new, not on their book value in the accounts, which has been reduced by depreciation.
Values should be reviewed every year, because building costs, equipment prices and sales levels change. Large organisations often report TIV by location, because a fire or flood at one site is the main risk.
A schedule of locations lets the insurer see where values are concentrated, and lets the company see which sites need the strongest protection. Finance teams often keep this schedule alongside the fixed asset register so that new purchases are captured as soon as they are made.
In practice
Real-world examples.
Example
A bakery owns a $350,000 building, $120,000 of ovens and fittings and $30,000 of stock, with $200,000 of annual profit and fixed costs to protect. It reports a TIV of $700,000, and the broker uses that to arrange a single policy.
Example
A retailer with ten stores prepares a schedule that lists the value at each location. The broker sees that its flagship warehouse holds half of the total, and recommends a higher limit and sprinkler protection there.
Example
A logistics company expands by buying $900,000 of new trucks but forgets to tell its insurer. When one is stolen, the insurer points out that the declared TIV was too low and reduces the payment.
Formula
Calculation
Total insurable value = Buildings + Equipment + Inventory + Business interruption value
Indicative premium = Total insurable value x Premium rate
Suppose a manufacturer's replacement cost for its building is $1,200,000, its equipment is $400,000, its average inventory is $300,000, and 12 months of lost gross profit would be $600,000. TIV = 1,200,000 + 400,000 + 300,000 + 600,000 = $2,500,000. At a premium rate of 0.20%, the indicative annual premium = 2,500,000 x 0.0020 = $5,000.Case study
Seen in the real world.
Stonebridge Plastics is an illustrative, fictional manufacturer that insured its factory using values set five years earlier. Its TIV was declared as $3,000,000, made up of building $1,400,000, machinery $900,000, inventory $400,000 and business interruption $300,000.
A broker visiting the site noticed that rebuilding costs had risen and the company had added two new moulding machines. A revised valuation put the building at $1,900,000, machinery at $1,500,000, inventory at $500,000 and business interruption at $800,000, a new TIV of 1,900,000 + 1,500,000 + 500,000 + 800,000 = $4,700,000.
At a premium rate of 0.20%, the premium rose by about $3,400 a year, from $6,000 to $9,400, but the company was now properly covered. In the illustrative fire that followed a year later, the insurer paid the full loss without any reduction for underinsurance.
Watch out
Common mistakes.
- Using the book value of assets from the accounts, which is lower than replacement cost, and so under-reporting the value to be insured.
- Leaving out business interruption, even though lost income after a fire can exceed the damage to the buildings.
- Not updating the figure when buildings, equipment or sales change, which creates a gap between the cover and the true exposure.
Questions
People also ask.
Is TIV the same as the amount I will be paid after a loss?
No, the payment depends on the policy limit, the deductible, the valuation basis and the actual loss, and TIV is only the declared value used to set up the policy.
Does TIV include land?
Usually not, since land is not destroyed by fire or storm, although some policies cover site clean-up and landscaping.
How often should TIV be reviewed?
At least once a year and whenever the business buys major assets, builds, or changes its operations.
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