How to prevent undervaluation of your clients’ homes

Property portfolios across Canada are undervalued by as much as 40%. The culprit is a nuanced, but common, misconception: confusing property valuation with replacement cost. Quite simply, we are not properly aligning premiums with exposures. And it’s putting us all at risk.

Too often, valuations are anchored to market price or static appraisals, not the more dynamic metric of true rebuilding costs. Replacement cost is not what a property could sell for or what it was built for 20 years ago. It is the current sum required to demolish, clear and reconstruct a home or building under prevailing conditions, using current materials and up-to-date building codes.

Canada’s insurance industry paid out more than $9.1 billion in natural catastrophe losses last year, including damage arising from wildfires, hailstorms and floods.

Most claims are resolved amicably, but settlement disputes inevitably arise when the replacement cost in the policy falls short of what it actually takes to rebuild a structure. For example, after a catastrophic event, many insureds discover their coverage was based on outdated valuations or broad market estimates, leaving them unable to rebuild at today’s prices or timelines.

Why the calculation fails

At root is a systemic problem: valuations are static, completed at the inception of a policy, then adjusted for the consumer price index, which broadly measures inflation each year. This commonly used approach ignores spikes in material and labour costs, code upgrades, supply chain failures and regional wage changes.

Consider these realities:

• Quebec construction wages jumped 8% last year
• After disasters, local building materials stores were depleted and costs surged
• Skilled trades shortages drove up labour costs and slowed recovery periods
• Additional living expenses climbed as reconstruction timelines were pushed out.

A one-size-fits-all formula or light adjustment cannot keep pace with these dynamic variables. The result? Premiums collected for property portfolios are well below the actual replacement costs, leaving insurers, brokers and customers at risk.

Downstream consequences

When replacement cost calculations miss the mark, the ripple effects are severe. Among the most severe impacts:

• Policyholders pay premiums that don’t reflect their real risk
• Brokers and carriers face increased errors and omissions and other litigation, as well as reputational risk exposures from underinsured clients
• Reserves are set too low to withstand serial catastrophic events
• Eventually the system self-corrects via higher premiums, withdrawn capacity or new exclusions, but this process is often painful.

In soft market conditions, some clients celebrate lower rates. But this only masks the problem temporarily. When the market hardens, the adjustment is sharp and often unaffordable, driving some clients out of the insurance market entirely.

Dynamic valuation

Quite often we think of replacement costs in terms of all the things required to rebuild. That’s a claims-costing approach, not a replacement cost approach.

Replacement cost valuations are holistic, constantly evolving equations that incorporate all costs involved in rebuilding.

To provide an all-inclusive costing framework, insurance providers must collaborate with specialized appraisers to anticipate the impact of cost surges on pricing during the full cycle of reconstruction — including demolition, debris removal, bylaw upgrades and temporary accommodation.

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Plus, local data points must be carefully factored to ensure an accurate valuation.

We’re not realtors. Our role is not to estimate what a property could sell for, but to ensure that if disaster strikes, a family, business or community can return to normal life without financial ruin or acrimonious claims battles.

Until the industry recognizes the fundamental difference between insurable replacement cost and static property value, the cycle of underinsurance and surprise shortfalls will persist.

Caroline Schweppe is the Canadian representative for property valuation software maker e2Value Inc. This article is excerpted from on that appeared in the December 2025-January 2026 print edition of Canadian Underwriter.