Index-linking is a mechanism employed by insurers to ensure that the sum insured for your property, which should represent the full cost of rebuilding, remains as accurate as possible. For guidance on the level of index-linking, insurers generally use the Building Cost Information Service (BCIS), who operate under the umbrella of the Royal Institute of Chartered Surveyors (RICS). The amount of index-linking is used for updating the sum insured each year as your policy is renewed.
- Bob takes out a buildings insurance policy in January 2021. The total rebuild cost is calculated at £210,000 and is the sum insured under Bob’s policy.
- In January 2022, Bob’s index-linked policy is renewed. According to the BCIS the cost of rebuilding has risen by 9.5% since January 2021.
- Bob’s renewed policy is updated to reflect the rise in rebuild costs, and the sum insured for his property increased to £229,950 (£210,000 + 9.5%).
The amount of index-linking is not based on the rate of inflation, it’s calculated on the cost of items relating solely to the re-building of property. These include the cost of labour, materials, professional fees, plus debris removal and site clearance.
In early 2021 index-linking for rebuild costs was in low single figures. However, we’re now seeing index-linking for early 2022 approaching double figures, and if the cost of rebuilding is increasing by these amounts, then insurance premiums will follow this trend.
Why is this happening?
Increased global demand in the construction sector, combined with logistic issues caused by covid, have resulted in unprecedented shortages, delays, and ultimately increased prices of materials and labour. Within the UK, complications resulting from Brexit have exacerbated this situation affecting all aspects of trade and labour availability. The repercussions are that in late 2021 construction costs in the UK had reached a 40 year high.*
Rather than risk underinsurance by relying on index-linking over long periods, we recommend that you check your rebuilding costs regularly (at least once every 5 years). Underinsurance can present a costly threat to any business. For example, if an insurance policy covering a building has a sum insured of £70,000 and at the time of a serious fire the true value is £100,000, then any resultant claim would be subject to what is known as ‘average’ and insurers would limit payment to 70% of the loss. This recognises that the building is underinsured by 30%. So, if the fire caused damage of £40,000 and there is a £250 excess, the claim payment would be reduced as follows:
|Claim £40,000 x 70% Average:
|Less policy excess:
|Payment by insurer
How can Lansdown help to limit the effects of this on you?
It’s important to seek professional advice. As a Lansdown client, you could benefit from our partnership with RebuildCostASSESSMENT.com, meaning you could receive your assessment for just £179**.
To learn how your premium is also impacted by claims inflation, please read part 1 of this blog here.
Lansdown Insurance Brokers are specialists in Block of flats insurance, Personal insurance and Business insurance. We are able to provide flexible policies to suit individual client needs and provide advice on what cover is needed. For more information call the team on 01242 524498.
*Based on the annual growth of the BCIS Materials Cost Index.
** Subject to acceptance criteria