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Building Insurance – What is Index linking and why does my insurance premium keep going up!!
Index linking is the technical term for an adjustment percentage added to your building sum insured. It is the insurer’s way of keeping your buildings reinstatement value in line with inflation to protect against under insurance as costs naturally increase over time.
How is it calculated?
Insurers use various ways to calculate index linking with many insurers referring to information provided by the Building Cost Information Service (BCIS), which is part of the Royal Institute of Chartered Surveyors (RICS).
The calculation draws on a number of government studies, insurer data, and changing cost of labour, materials and professional fees.
The BCIS website has a table showing its calculated base index linking rates here.
Individual insurers will then apply an index linked rate which is adjusted monthly to all renewals being underwritten during that period. Historically the indexation rate has been 3-5%, but a number of factors are currently affecting both inflation and the cost of living, which is why many insurers are typically applying a 9-10% rate to a buildings sum insured.
These changes in the economy also affect the costs of claims and the time it takes for a property to be reinstated following a loss, which impacts business interruption payments and the premium applied.
As such many insurers are adjusting their premium rates in addition to indexation changes which means that many property owners are seeing increases of 15-20%.
What is affecting indexation?
Some of the factors which underpin this are:
- Raw material such as timber are affected by supply chain issues resulting from the pandemic, Brexit and now Ukraine are adding to costs and delays in building repair. Fuel and energy increases affect transportation and manufacturing costs.
- Skill shortages impact the day rate charged by a number trades and add to the cost of construction.
- Delays in repairs increase the cost of providing alternative accommodation for claimants while work is carried out. Rising interest rates are forcing landlords to increase rents for accommodation too.
- Regulation – The Fire Safety Act 2021 increases the fire safety responsibilities of professionals involved in construction and management of buildings, including external walls and fire doors. This impacts reinstatement costs with the need for specialist professionals or materials to be used.
What else can your broker do about?
Not much unfortunately. Changes to a building sum insured can be discussed with your broker at renewal or midterm but neither your broker or insurer will be able to advise on whether a value is correct. Building owners should be aware of obtaining the right type of valuation for property insurance purposes by seeking a reinstatement cost valuation by a RICS qualified valuer for insurance purposes.
At Clarke Williams we have access to third parties who can provide rebuild costs assessments at discounted prices. For more information contact our account handlers today.