This is an estimate of the cost to build new, but insurance estimate needs to be cost to rebuild.
Rebuilding is more expensive.
Fannie Mae allows the lender to use the cost approach as a metric for setting the minimum insurance requirement for selling the loan into the secondary market. That doesn't mean it would be an insurance limit adequate to rebuild after a total loss or to protect the policyholder from a coinsurance penalty.
If an insurance agent asked for the "cost approach" number off the appraisal rather than use the software they've been provided by the carriers, I'd look for a new agent.
They're either not well trained, or deliberately trying to win your business by getting the lowest (initial) quote with an artificially low replacement cost value.
Check the value yourself at accucoverage[dot]com, e2value, or 360-value. These are all insurance based estimated tools. If an agent does it for you, review the inputs in detail; the system generated assumptions may not match your home.
Google "reconstruction" "new construction" insurance and "replacement cost" and you should find more details on the issue.
If you'll google cost approach you'll find several very good explanations. Typically, they use cost approach for homes that are unique in the community. For example, when appraising a Victorian home, they will determine how much it will cost to rebuild, replace.
Basic steps in the cost approach are:
Estimate the value of the land as if vacant
Estimate the replacement cost new of the improvements
Estimate the loss in value from all forms of depreciation
Deduct the total amount of depreciation from the replacement cost new
Estimate the same amount for any other improvements
Add the land value estimate to the depreciated cost value to arrive at the total property value
Step One, land valuation, may involve any of the methods already mentioned(allocation, abstraction, etc.)
Step Two, estimating the replacement cost new of the improvements, requires that a distinction be made between replacement cost and reproduction cost.
Essentially, appraisers use three approaches
The Sales Comparison Approach
The Cost Approach
The Income Approach
For tract homes that are similar in the same community, they may use the sales approach instead .