A staggering 40% of all UK properties are believed currently to be under-insured.

Index Linking is a method used by Insurers to help property owners ensure they are adequately protected against the rising cost of rebuilding or repair when a property is damaged or destroyed.

 

How Index Linking protects property owners

Index Linking is a percentage increase applied to the building sum insured value at each policy renewal so that the property is adequately insured in the face of rising costs.

The current uncertain economic climate has led to a steep increase in construction costs.

Brexit has disrupted imports into the UK, causing severe delays in receiving construction materials.

The recent 20% increase in the price of construction materials (a 40-year high) is a result of higher production costs and the impact of energy price rises.

Many construction projects were paused or postponed due to the pandemic, but now projects are resuming there is a huge spike in demand, keeping prices high.

The Russia/Ukraine crisis is expected to further exacerbate the problems in the construction materials supply chain.

To address these issues, insurers are raising their Index Linking figures from the historically typical range of 4-6% up to 8-15%.

 

What is underinsurance?

Property owners need to protect themselves against damage or destruction, which may require major repairs, or in the worst-case scenario, a complete rebuild of their property.

When they initially take out insurance cover against such eventualities, they typically take professional advice to help them make an informed estimate of the full cost of rebuilding the property, and make that the sum insured.

Over the term of the policy, any number of unpredictable factors such as inflation, and the rising cost of construction materials and labour, will directly affect the rebuild cost of any UK property which can increase significantly, often with little warning.

Unprecedented factors such as the aftermath of Brexit and the global pandemic mean those costs are likely to continue to increase over the short to medium term.

This can leave a property insufficiently insured and the owner at risk of being unable to claim the full cost of repairs or a rebuild.

 

How does underinsurance affect a claim?

Underinsurance has negative implications when a policyholder needs to submit a claim, particularly in the case of a total loss – for example, when a property is destroyed by fire.

Unlike home insurance policies, most property-owner policies include an averaging clause, stipulating that claim settlements will be reduced in line with the degree of any underinsurance.

For example, let’s assume you need to make a claim for damage to your property costing £10,000 to repair. If, when the claim is assessed, your property is found to have been underinsured for the current total rebuild cost by 10%, then that percentage shortfall  (ie 10% = £1,000) would be deducted from the claim settlement.

The effect of underinsurance is even worse in the case of a total loss. The maximum insurers would settle a claim for is the rebuild sum insured (plus any percentage uplift amount which may be written into the policy). If the policyholder had set the rebuild value at £800,000 but the true value was £1,000,000 the shortfall could leave insufficient funds to carry out a full rebuild of the property.

 

What are the implications for your property insurance policy?

In short, current market conditions have caused substantial increases in the cost of building new properties and rebuilding existing properties.

Raising Index Linking percentages is the Insurer’s way of addressing the issue, helping you to ensure the rebuild value of your property is adequately covered.

RTIB and the insurance market recommend updating your rebuild value with a rebuild assessment or property survey every 5 years, conducted by a qualified surveyor.

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