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Property Insurance – Index Linking

Some Insurers are currently index linking at 12.8% buildings and 9.5% contents. This shows no signs of slowing down, with other major Insurers predicting their rates may even top 20%. Not all policies will be index linked and you MUST check your policy at each renewal to ensure the sums insured are correct.

Property Insurance – Index Linking

8 March 2022

Some Insurers are currently index linking at 12.8% buildings and 9.5% contents. This shows no signs of slowing down, with other major Insurers predicting their rates may even top 20% later in the year.


So, what is Index Linking?

Index linking (or indexation) is the adjustment of an asset’s value to reflect inflation and deflation. In Commercial Property Insurance terms, it’s a percentage that is applied to the Declared Value of the property at each renewal so the insured value remains relevant. Index linking an insurance policy gives some protection against being underinsured.

Why are Insurers increasing their percentages so much?

This is due to a number of factors – a significant rise in demand for building materials, disruption to the supply chain caused by the pandemic and Brexit, in addition to workforce shortages affecting rebuilding and claims costs. Insurers use a number tracked indices of property value to determine their calculations, including data supplied by RICS, the ABI and ONS. Historically these indices have grown at a relatively low rate, but in 2021 the growth wass significant and sustained.

Rebuild Value -v- Sum Insured?

There is a difference between the ‘rebuild value’ and the ‘sum insured’ on your policy documents.

  • Rebuild Value – the total cost of rebuilding the property to its former state following a total loss
  • Sum Insured – includes a percentage increase on top of the rebuild value and is designed to cover inflation during the insurance year. The sum insured needs to be adequate to fully reinstate the buildings / contents / replace stock etc should there be a catastrophic loss – this should also include costs for removal of debris, professional fees etc.

Rebuild Cost Assessment

Rebuild value is not the same as market value. It’s therefore recommended that Rebuild Cost Assessments are undertaken every three to five years in order to ensure that the Rebuild Value of a property is adequate. However, with inflation so high it’s now more important than ever to have your buildings value declared correctly and to review this regularly.

The Building Cost Information Service (BCIS) of RICS produces a range of detailed guidance on the cost of rebuilding houses and flats for the ABI. Their site at abi.bcis.co.uk provides general guidance on the rebuild cost of houses and some types of flats. For commercial purposes, visit www.rics.org for a range of solutions.

What does this mean for my renewal?

Not all policies will be index linked and you MUST check your policy at each renewal to ensure the sums insured are correct.

If your policy is index linked, this will undoubtedly constitute an increase in premium as the value of a property insured is increased. Index-linking is applied in addition to any rate increases and so it would be wise to ensure that any budgeted amounts are taking both of these elements into account.

 

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