***this is a legitimate question, and I’m leaving names out so there are no violations. Please set personal opinions aside when replying. ***
I recently heard of a NY businessman who received a fine in NY civil court for inflating the values of his assets to “banks and insurance companies” to get better rates.
I understand how inflated values would help him get a lower interest rate on a bank loan, but how does inflating the value of an asset to an insurance company help him get lower premiums?
I would assume a higher “value” would attract a higher premium since the insurance company is risking a larger loss.
In: Economics
The reasons to inflate the values of your properties are to:
– Secure bigger loans against those properties. If the property is worth more on paper than it actually is you can borrow more money against with with lower interest rates. This would be like claiming your $200,000 home is worth $400,000 because “you said so” and telling the bank to loan you the difference as a mortgage.
– you can use the value to negotiate lower insurance premiums. Having a higher value asset means low liabilities to the insurance companies. Lower risk means lower premiums.
– You can manipulate the situation using corporate accounting techniques to pay less in Federal taxes.
To accomplish this you would also need to fake assessments, possibly forge the signature of respected auditors, and repeatedly lie in your accounting.
The risk here is if your property fails to make money, or you default on the loan, the bank may end up needing to seize the property at which point they will discover that its value is far less than you reported. The bank will lose a ton of money.
This wouldn’t be being smart, it would be committing wide scale business fraud and tax evasion and it’s very illegal.
For banking, I will also add that borrowing 200 million in a 400 million building, with inflated value, will allow you to get a much, much lower interest rate on the loan, because it looks safer to the bank than it actually is.
A NY business man who was recently fined for inflating the value of the assets, was fined equal to the interest rate savings that was illegally gained by misstating the value of his assets.
i don’t know as much about insurance, and I’m not sure why it would help, unless something to a property that was already insured.
After reading DarkAlmans reply, I’ve been searching high and low for an answer, and am now wondering when assessing the premium of a single specific asset, do the actuaries take into account the over inflated value of ***ALL*** the assets/properties owned by the company of the insured?
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