Most short-term insurance policies are based on replacing your insured property or assets at new-for-old. This means that if an event arises that damages your property or assets, you can submit a claim to your insurer and they will repair the damage or replace the asset with the equivalent new. This is in line with the principle of placing you in the same financial position you were in directly before the event occurred.
What are the implications?
Firstly, when insuring your house, office building, or warehouse, the basis of determining the value must be new replacement cost and not market value or any other value such as the municipal value. New replacement cost is what it will cost to newly replace your building(s) today. Building cost increases over time, so you need to ensure that you annually revise the assessed value on your property. This can be done either by yourself, if you are knowledgeable of the construction industry, or via a professional estimator. If you have used an estimator before, then updating the new replacement cost annually can be done at a fraction of the cost. You then contact your insurer and they update the value. An important point here is that the insurer annually renew your policy at a 10% increase. In other words, your insured amount in year 1 will increase by 10% annually to keep track of building cost inflation. The problem with this is that building cost inflation can be more or less than this provision. Also, your specific property profile can be different to that of other properties and increasing it with a generic 10% might be (will be) insufficient or over-sufficient. The problem with over-insurance is not that you are paid out, but that you are paying too much in premium. Conversely, when you are under-insured you are paid out too little i.e. it is going to cost you more than what you were insured for even though you could afford the convenient monthly premium. That is, unless your strategy is to pay a premium that is affordable i.e. deliberately under-insuring, so that you are covered partially and then finance the balance yourself in the case of something happening (from your savings, for example). The assumption with this deliberate strategy is that you have partial peace of mind i.e. partial insurance, and you consider your risk to be low and the chance of something happening to be very little. This is a risk some are willing to take, which has the benefit of a lower premium, but under payment (by the insurer) if something should happen.
Secondly, the value basis for insuring your household content such as the TV, couch, fridge etc. is also at new replacement cost. However, there is a very important distinction between movable assets such as your TV or fridge and immovable property such as your house or office building or warehouse. The difference between the two is that movable assets decrease at a higher rate in value than immovable property. For example, if you buy the latest Samsung fridge or TV today and something (damaging) happens in 5 years and you need to claim, the value at which you need to insure the fridge or TV at is the equivalent fridge or TV on that future day in terms of functionality. The challenge is that technology improves over time and items become more affordable. Replacing a fridge or TV that is ground-breaking and expensive in year 1 is much more affordable in year 5 as there are better technology on the market. Therefore, decreasing the value of the fridge or TV over time is important to not over-insure. It is easier to over-insure with movables than with immovable property. Immovable property tend to move at slower rates with building technology and green technology developing gradually over time. As a result, you tend to be under-insured in the case of immovable property.
Finally, in contrast to immovable property and movable assets, your car or vehicle are not insured on new replacement cost, but market value or book value. The motivation given by the insurer is that a vehicle has many moving parts and wear and tear is quite high and as a result market value is used. This does not necessarily make sense if you think about it as your fridge or TV also wears with use over time. However, if you argue that replacing your car with a second-hand equivalent make and model in the case of an accident, is more easily done than with a fridge or TV, it might make more sense. Although a second-hand market for vehicles (via certified dealers) and movable assets (via gumtree or olx, for example) exist, the former probably has a greater likelihood of obtaining a car in good or similar condition and of similar make and model. Nevertheless, what is important for insurance purposes is not why but how (in this instance asking why is not going to change the fact). We (as the consumer) are, generally speaking, not going to change the policy of the insurer, so being aware of how the insurer structures its policy is more important from a practical perspective. The insurer insures your vehicle at market value, not new replacement cost. Why is not important, that is how it is done and that is how you need to insure (unless you lead a revolution).