Value at Risk (VaR) refers to the total value of the property or assets that are insured, essentially, what’s financially at stake if a major loss occurs. It helps insurers and policyholders understand the scale of risk and is used to calculate how much insurance cover is needed.
In home insurance, this typically means the full rebuild cost of the property, plus any permanent fixtures or specified valuable items. For landlords or businesses, it may also include rental income, commercial stock, or operational assets.
Example of Value at Risk in a residential property
Let’s say you’ve taken out buildings insurance on your home. Unfortunately, a major fire breaks out and causes extensive damage, affecting not just the structure of the house, but also parts of the roof, internal fittings, and a detached garage.
To settle your claim, your insurer needs to understand your Value at Risk; that is, the full cost of putting everything back the way it was before the fire. This includes:
- The full rebuild cost of the property, including demolition, clearance, labour, materials, and professional fees like architects or surveyors
- Additional features, such as a garage, conservatory, garden walls, or fences
- Landscaping like decking, patio areas, or driveway damage (if included in your cover)
- Fitted kitchens, bathrooms, and flooring – these are classed as part of the building, not contents
- Contents, but only if you also have contents insurance and the items were declared properly
Now, imagine your property’s true Value at Risk is £350,000, but your insurance policy only covers you for £250,000. You’ve effectively underinsured the property by 29%.
Even if the fire caused £100,000 worth of damage and not a total loss, your insurer could reduce the payout by the same percentage, leaving you to cover the shortfall. This is because of the “average clause” in many policies, which penalises underinsurance.
In this case, you might only receive ~£71,000 instead of £100,000, because the insurer deems that you didn’t insure the full risk.
Who calculates Value at Risk?
In most cases, you (the policyholder) are responsible for making sure the Value at Risk is accurate when you take out or renew your insurance. This figure forms the basis of your buildings sum insured, and it’s what your insurer will refer to when settling any claims.
Your insurer may offer basic tools (such as online rebuild calculators), but these are only rough guides and often don’t take into account specific features like:
- Non-standard construction materials
- Listed or heritage status
- Unique or high-end fixtures and finishes
- Extensions, outbuildings, or basements
- Location-specific factors like access issues or conservation areas
For this reason, insurers often recommend or even require a professional Rebuild Cost Assessment (RCA) or a formal valuation, especially for:
- Older or listed buildings
- High-value homes
- Commercial or mixed-use premises
- Large or complex landlord portfolios
A chartered surveyor can carry out an RCA to give a detailed and reliable figure. This helps avoid underinsurance and the potential financial penalties that can come with it.
FAQ’s
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What is the difference between Value at Risk and Sum Insured?
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- Value at Risk is the total value that should be covered.
- Sum Insured is the amount you’ve actually insured for. If it’s lower than the true VaR, you may be underinsured.
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Does Value at Risk include the land?
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No. VaR only covers the cost of rebuilding or replacing the insured structures, not the land itself.
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Can I update my Value at Risk?
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Yes, and you should. Review it if:
- You renovate or extend your property
- Building costs increase significantly
- You add valuable new items to your home
