Market Value refers to the fair value or the price at which an asset would sell under competitive and open market conditions, where the parties involved are knowledgeable, willing, and able under no pressure to trade. This value represents an estimate of a price agreed upon by a willing buyer and seller, assuming both parties enter into the transaction freely and knowledgeably.
Key Points:
Competitive and Open Market: Ensures that the price reflects general market conditions without manipulation or undue pressure.
Knowledgeable Parties: Both the buyer and seller are assumed to be reasonably informed about the nature and quality of the asset, its utility and its price in the market.
Fair Sale Conditions: There is no compulsion on either party; both are engaging in the transaction willingly.
Importance in Insurance:
In insurance, the concept of market value is crucial for determining the level of compensation after a loss event. It helps in establishing the insured value of an asset and calculating premiums accordingly.
Comparable Sales Method:
One common method used to establish the market value of a real estate asset is through comparing it with similar properties recently sold in the same geographical area under similar conditions.
Regulations and Acts:
Various financial and insurance regulations and acts consider the notion of market value to ensure fair practices. For example, International Financial Reporting Standards (IFRS) necessitate the measurement of certain assets and liabilities at fair value at each reporting period. Additionally, the Sarbanes-Oxley Act in the USA mandates rigorous financial disclosures including transparency about values of assets.
