Valuing Assets for Sum Insured: Buildings, Plant, Stock and IT

Three values, and only one of them is right

Every asset has at least three values, and they can differ by a wide margin.

Book value is what the accounts say: cost less accumulated depreciation. It exists to satisfy accounting and tax rules, and falls every year regardless of what the asset would cost to replace.

Market value is what the asset would fetch if sold today in its current condition. For a specialised production line it may be close to scrap; for a building in a good location, far above book.

Reinstatement value (replacement or new-for-old value) is what it would cost to replace the asset with a new one of the same type and capacity, delivered, installed and commissioned, at today’s prices.

For an operating business the sum insured should almost always be reinstatement value, because that is what you will need to spend to get back to where you were, and the policy should be written on reinstatement basis to match. If the policy is on market-value basis, the sum insured should be market value, and a loss will leave you funding the difference between an old asset and a new one yourself.

Why depreciated book value is the classic mistake

The most common way a sum insured goes wrong: someone asks finance for “the value of the plant”, finance sends the net block from the fixed asset register, and that number goes on the proposal form. It is easy to obtain, it is audited, and it is wrong.

Say a bottling line was bought eight years ago for ₹4 crore. Its net book value might now be ₹80 lakh. A comparable new line today, allowing for price increases and currency movement on imported parts, might cost ₹6 crore. Insure it at ₹80 lakh on a reinstatement policy and every claim on that line will be paid at about 13%. The mechanics are set out in under-insurance and the average clause.

Gross block (original cost) is better than net block but still wrong: it is historic cost, not today’s. The register should carry a reinstatement value alongside the accounting values, maintained for insurance purposes and never simply copied from the ledger.

Buildings and plant and machinery

Buildings. Reinstatement value for a building is the cost of demolishing what is left, clearing the site and rebuilding to the same specification at current construction rates, plus professional fees. Land is not insured. For standard industrial sheds a cost-per-square-metre figure from a quantity surveyor is usually adequate; for cold stores, clean rooms or process buildings, get a specific valuation. Include boundary walls, roads and services if the policy covers them.

Plant and machinery. Build the value up line by line from the asset register, not as a single estimate for the site. For each material item, the reinstatement value is the current price of an equivalent new machine plus freight, duties, installation and commissioning. Where a machine is no longer made, use the nearest modern equivalent of the same output. For imported items, note the currency and the rate used. Group small items, but keep large ones individually identified so a surveyor can trace the sum back to the asset.

Stock: floaters and declaration policies

Stock is different because its value moves every day. Raw material arrives, work-in-progress builds, finished goods ship. A fixed sum insured is either too high most of the time or too low at peak.

The basis for stock is normally cost: raw materials at landed cost, work-in-progress at cost to that stage, and finished goods at cost of manufacture (or at selling price where the wording allows it, which matters for goods sold but not delivered). Two policy structures deal with the fluctuation:

• Floater policy. One sum insured floats across several locations, so that stock can move between warehouses without each location needing its own limit. The sum must cover the maximum total across all locations at any one time.
• Declaration policy. The sum insured is set at the expected peak, a provisional premium is paid, and the insured declares the actual stock value periodically, typically monthly. At year end the premium is adjusted to the average declared value. Miss a declaration and the insurer will usually treat the last declared value as the sum insured for that period, so the discipline matters.

Many businesses combine the two into a floater declaration policy. Either way, the stock figure should reconcile to the inventory system, not to a guess.

IT and electronic equipment

IT is the class where book value and reinstatement value diverge fastest, and where the sum insured is most often forgotten. Servers, network equipment, laptops and instruments depreciate quickly in the accounts, are replaced with models that cost more or less than the original, and are spread across many locations and many small purchases. Practical rules:

• Insure IT on reinstatement basis under an electronic equipment or all-risks policy rather than lumping it into the general contents sum.
• Value it at current replacement cost of equivalent capacity, not at what was paid.
• Include software, licences and data reinstatement costs if the wording covers them.
• Pull the list from the IT asset management system at renewal rather than from finance, because IT knows what is actually deployed.
• Treat laptops and mobile devices as a separate schedule, often on a worldwide basis, with the count refreshed at each renewal.

Escalation clauses and how often to revalue

An escalation clause increases the sum insured automatically through the policy year, usually by a stated percentage spread evenly across the period, for a small additional premium. It absorbs inflation and routine capex between renewals so that a sum which was right at inception is still adequate on the last day. It does not repair a sum that was wrong to begin with, and a new production line still needs an endorsement.

How often to revalue depends on the asset class:

• Buildings: a professional valuation on a rolling cycle for large sites; index annually in between using a documented construction cost uplift.
• Plant and machinery: a full valuation of the major sites every few years; annual review of the line-by-line register, with capex and disposals reconciled at every renewal and imported items adjusted for currency.
• Stock: continuously, through declarations, with the peak sum reviewed at renewal against the previous year’s highest declaration.
• IT: annually at renewal from the IT asset list, because churn is high and individual values are modest.

Whatever the cycle, write down the method, the date and the assumptions. A sum insured that can be explained is defensible in a claim.

Keeping the register and the sum insured in step

Valuation is a routine, not a project. The register, the fixed asset ledger and the policy schedule drift apart unless something forces them together. The corporate insurance register is the mechanism: every insurable asset recorded once, tagged to a location and a policy, with its reinstatement value and the date and basis of that value. A short discipline keeps it honest:

• Every capex approval above a threshold triggers a register entry and, where material, a mid-term endorsement.
• Every disposal is recorded so that premium is not paid on assets that no longer exist.
• Finance sends the capitalised additions list by location before each renewal, and the insurance owner reconciles it to the register.
• The renewal schedule is generated from the register, not copied from last year’s policy.
• Differences between register value and sum insured above a stated tolerance are flagged and either corrected or explained.

SAIBA Corporate links each asset to the policy that covers it and shows where the two figures have diverged. The aim is simple: on the day of a loss, the sum insured and the value at risk are the same number.