I know that the measure of exposure for commercial property is the sum insured year. One of the reason as to why the measure of exposure is complicated is that there is no standard way of allowing for inflation in the policy unlike household property policy. Can someone explain the above reason with an example please? Many Thanks
Domestic properties, while varying in size, tend to be relatively homogeneous in respect to the inflation of rebuilding costs. Commercial properties, on the other hand, are all different (in terms of size, construction material etc.) and therefore the rate of inflation applying to their re-build costs can vary quite a lot. For example, compare a small retail shop with a large warehouse constructed out of some sort of metal. The costs of rebuilding (and inflation of these) will depend on the costs of the underlying materials, which could be inflating at very different rates. I hope this helps...
