Reconstruction Cost Model for Housing Insurance

Abstract

Insurance policies are a fundamental risk management tool for the housing market. Climate change and extreme events together with a growing urbanization are increasing the relevance and need for insurance. Every year the number of incidents is increasing, as well as the insurance claims. Frequently, when dealing with total losses, the indemnities are insufficient to cover the reconstruction costs. This paper proposes a simplified reconstruction cost model that can improve the transparency of the market and help insurers calculate the insurance value. The model was applied to Portugal. The motivation was the problems with insurance claims arising from severe wild fires in 2017. The model was tested using a set of 48 properties. The results of the model show that reconstruction costs are higher than those obtained by the previous methodology. The structure and variables of the model can be used in other countries by insurance companies upon necessary calibration of the parameters.