Location Can Impact Insurable Property Values

Location Adjustment Factors

A key indicator that should be taken into consideration when assessing the insurable replacement cost of a property is where the property is located and the specific characteristics of the region. There are many geographic, economic, and governmental elements that can impact the insurable replacement cost of a property. Topography, weather, population density, local regulatory constraints, access to skilled labor, the health of the local economy, and the potential risk of natural disasters are among the most important characteristics that should be analyzed and accounted for when assessing new replacement costs.

Why Location Matters

Natural disasters are among the most significant events that routinely impact the insurance market. Hurricanes, tornadoes, earthquakes, wildfires, mudslides, and other events can result in total property loss.

Southern California is also one of the most expensive regions in the world, with property values on par with those of London, Tokyo, and New York City. The recent wildfires that have ravaged Southern California are a prescient reminder of how location can have a significant impact on insurable value. Southern California is exposed to many of the risk factors identified in this article.

Despite being one of the most expensive and condensed metropolitan regions in the country, Los Angeles has continued to be a hotbed of industrial and commercial construction. High demand for limited space has driven up the cost of construction projects in Southern California. In the last 4 years, construction costs in Los Angeles rose by nearly 40 percent and over 60 percent in the last 10 years. ¹

The region is also subject to specific laws and regulations that create additional pressures on property insurance. California requires union labor for many industrial properties as well as compliance with certain environmental regulations that can impact replacement cost value. California also demands construction firms to use higher quality building materials to achieve mandated energy efficiency requirements as well as seismic standards given the frequency of earthquakes in the region. ² The costs associated to comply with these standards should be taken into consideration when analyzing the insurable value of property in California.

Beginning on July 1, 2025, California State Bills 253 and 261 will require any company that is doing business in the state with more than $1 billion in total annual revenue to report greenhouse gas emissions and provide a climate-specific financial risk assessment. Failure to comply with these requirements could result in financial penalties. Companies that are engaged in chemical, petrochemical, or other industrial processing activities will have to devote significant resources and capital to comply with the new legislation.

Hurricane Helene has also had devastating impacts on the Appalachian region of the Eastern United States. However, very different factors impact insurable value in that locality. Unlike Southern California, the areas that have been most adversely impacted by Hurricane Helene are largely rural. The region is also mountainous, with some areas inaccessible to conventional methods of transportation. Transporting materials and equipment that are distributed primarily from urban centers can be costly with extended lead times. Sparsely populated areas may also have limited access to power, water, and other utilities, which can drive up demand (and costs) due to limited supply.

A smaller local population base could lead to significantly higher labor costs for certain skilled workers or individuals who have specific expertise. Urban areas, while generally more expensive, enjoy greater access to skilled labor training and apprenticeship programs offered by major corporations or trade schools. Rural markets are more likely to see skilled labor shortages as a result of lower wages and lower volumes of industrial-scale projects. The residual impact of construction projects in rural areas has risen considerably in recent years.

The unique terrain and the ease (or difficulty) to obtain equipment are key metrics when determining replacement costs. For example, certain industries require a physical footprint at a high elevation, such as telecommunications and aerospace. In some instances, the only viable method to transport equipment is via helicopter. The costs associated with delivering equipment with a helicopter as opposed to more cost-effective means such as over-the-road vehicles or rail are significantly higher.

While the local impacts of terrain and market have a significant impact on replacement costs, broader regional differences exist that should be taken into account. The following chart illustrates the costs associated with nonresidential building construction by region as assessed by the US Bureau of Labor Statistics' (BLS) most current data. ³

Based on the BLS' data, to replace the same nonresidential structure in the Western region of the United States is significantly more expensive than the South and Midwest regions, respectively. In summary, the multitude of factors facing property insurers has created a complex matrix that should be applied to replacement costs, with location being a significant variable.

Liability Risk and Exposure

Property insurers must understand the potential risks associated with not utilizing location-specific adjustment factors when assessing insurable value. A national average that does not consider the unique characteristics of the property's region could be exposing the property to significant liability. Understanding and applying location adjustment factors can mitigate this potential liability.

Outlook for 2025 and Beyond

Natural disasters will continue to be a major talking point in the insurance community among all stakeholders. It is vital for insurance providers and property owners to understand the impact location has on loss prevention and replacement costs. Recent events have exacerbated the need for real-time information on a myriad of factors that can vary widely depending on where a property is located. Lawsuits are anticipated to rise in the coming years as a result of recently enacted legislation. A current valuation that takes all of these factors into consideration can assist property insurers in arriving at an accurate and reliable value for their portfolio of assets.