Inflation at its peak – time to re-evaluate assets

Risk Matters - Summer 2022 / 23

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.

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.  

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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.

Costs of construction

Accumulated savings forced by the pandemic along with government incentives and stimulus saw construction projects increase significantly over the past two years. 

The main inputs to a construction project can be split into three broad categories being:

  • Materials
  • Labour
  • Other costs such as professional services and consultants, borrowing costs and regulatory costs (as examples) 

Each of these categories can impact the costs of construction, and in turn asset values, significantly.

Materials - can make up around 40% of project costs

It is no secret that commodity prices including key construction materials have seen significant increases over the last two years. Largely driven by supply chain issues, increasing energy costs (which can contribute over 30% of the costs involved with manufacturing of some materials) and increased demand, particularly in the residential building sector, has seen the cost of key building materials such as steel and timber increase substantially.


Labour is often the largest component (typically makes up 50% of project costs) of a building/repair contract price. Coupled with reduced workforce availability via COVID-19 restrictions, The National Skill Commission (NSC) most recent Skills Priority List found that 42% of technician and trade occupations are currently in shortage, compared to an overall 19% shortage across all assessed occupations. 

The construction industry has been particularly affected by ongoing shortages of materials and labour. Organisations are experiencing a skills shortage leading many to offer pay rises that are more than double the rate of inflation, just to retain the workers they currently have. 

While inflation driven by the price of construction materials is apparent, with contractors and sub‐contractors still chasing highly skilled staff for major projects, we are yet to see the full potential impact of labour cost.

Plant and equipment, and contents

Whilst it is easy to focus on physical structures such as buildings, it’s important to remember that plant, machinery and contents assets form an integral part of local government’ asset base.   

Plant and equipment assets have not escaped the impact of inflation; in fact some plant and machinery assets have seen an increase of more than 25% over the past 12 months.

With a significant amount of plant and machinery assets being procured from outside of Australia from countries such as China, the US or across Europe, the inflationary and cost environment of these countries can have a significant impact on the cost of an asset.

Costs of shipping

A number of metrics are used to track shipping costs, one of which is the Drewry World Container Index (WCI). Spikes in early 2021 were followed by surges throughout Q2 and Q3 2021. This has dropped since February 2022 with the latest WCI composite index of $6,628 per 40-foot container 36% below the peak of $10,377 reached in September 2021 but still 84% higher than the 5-year average of $3,594.

With 28 of the 50 biggest ports in the world (by handling capacity) in China, the recent lockdowns have created ongoing bottlenecks with significant backorders leading to ongoing demand, long delays and lead time blow-outs continuing unabated.

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. 

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