Hulisani Madala, property and assets valuator, Aon South Africa

Understanding Insurance Replacement Cost of Assets and Why Accuracy Matters

When it comes to managing business risks, planning finances and getting the right insurance cover in place, knowing what your physical assets are worth in insurance terms is crucial. One of the most trusted approaches in the context of insurance is the Estimated New Replacement Cost (ENRC).

“ENRC estimates the cost to replace an asset as new — using current materials, construction methods, Original Equipment Manufacturer’s (OEM) pricing and associated technical aspects such as new tech compatibility — without deducting for wear and tear. It’s a future-focused approach that’s relevant for everything from plant and machinery to buildings, equipment and site improvements,” explains Hulisani Madala, a property and assets valuator at Aon South Africa.

An accurate asset valuation helps you:

• Get the right insurance cover. If your assets are undervalued, you risk being underinsured — meaning you won’t fully recover your financial loss in a claim. If your assets are overvalued, you’re probably paying too much in premiums.
• Meet insurer requirements. For complex or high-value assets, insurers typically require a professional valuation before issuing or renewing a policy.
• Back up your insurance claims. A clear, up-to-date valuation report helps speed up settlements and reduce disputes.
• Keep your financial records in check. While insurance values differ from book values, knowing the ENRC helps with reporting, audits and general asset management.
• Stay in line with market realities. Construction costs and material prices change constantly, while plant machinery & equipment is constantly in change, where similar parts are all that is available, and which may not be fully compatible with older processes, which extra costs need to be recorded— regular valuations help keep your insurance in sync with real-world replacement costs.

Not all assets are created equal, and neither are their valuations. The replacement cost of a manufacturing plant isn’t assessed in the same way as an office building or a specialised piece of equipment. Each asset class needs a valuation method that reflects its unique use, build and exposure to market conditions and technological change.

Physical vs Desktop Valuations: What’s the Difference?

When it comes to calculating ENRC, there are two approaches — both with their pros and cons:

Physical Valuation

This involves an on-site visit by a qualified valuer who assesses the asset in person.

• Pros – It is more accurate and reliable and helps identify assets not on the books or misclassified. It captures physical condition, wear and tear and site-specific risks.
• It allows for interrogation on the “what if…” scenario where it’s known that certain assets are no longer available
• Cons – It is time-consuming and more costly and requires access and coordination.

Desktop Valuation

This approach relies on existing records such as asset registers, site photos, previous valuations and industry guides — all done remotely.

• Pros – It is quicker, more affordable and ideal for low-risk assets or revaluations, while being less disruptive to operations.
• Cons – It relies heavily on the quality of existing data and can miss defects, unrecorded upgrades or non-compliance issues. Formal certification carries a mandatory disclaimer.

“The right approach often depends on the size, complexity and criticality of the assets being valued and for this reason, many businesses use a combination of both. At Aon Consulting we prefer a long-term maintenance program that works on a rotational basis, e.g. the first valuation is based on a full site inspection which is followed by desktop updates for the next three to four years with significantly reduced fees, followed by a full site inspection again in year five. The investment in maintaining accurate values will likely pay itself in savings on paying correct premiums and avoiding events that are uninsured or underinsured,” Hulisani explains.

Why Asset Valuation Is Worth Your Attention

Here’s what businesses stand to gain from investing in regular, accurate asset valuations:

• Smarter Insurance Decisions that avoid over- or under-insuring and make claims easier and faster to resolve.
• Stronger Risk Management that Identifies ageing, vulnerable or outdated assets before they cause problems, which can be identified for site business continuity planning.
• Better Financial Transparency that supports audits and compliance with reliable, updated values.
• Improved Asset Control that detects missing assets, plan capital spend and optimise asset lifecycles.

“Valuations are often utilised for insurance purposes to determine the replacement cost of an asset and to set appropriate policy limits. It also plays a fundamental role during Mergers & Acquisitions where the book value of assets is used to assess worth in buy/sell scenarios. Keeping track of the care and maintenance of assets is key to understanding an asset’s scrap value in guiding end-of-life decisions,” says Hulisani.

“Whether you own buildings, plants, machinery or equipment, asset valuation is more than just a compliance requirement — it’s a powerful business tool. If done correctly and on a regular basis, it helps you protect your investments, stay financially sound and make informed, strategic risk decisions,” Hulisani concludes.