Index linking and insurance
Index linking is applied by insurers to help make sure that the insured values are adjusted in line with changes in inflation, deflation and the cost of living.
With an index linked policy, the sum insured is automatically updated – usually increased – at renewal in line with economic changes. It’s most commonly used with buildings insurance to calculate the difference between the sum insured of the property and the rebuild value.
Insurance providers use various indices to calculate index linking, including the CPI (Consumer Price Index) and RPI (Retail Price Index). Ann Owen, Chief Underwriting Officer for Aviva Private Clients said “The Consumer Price Index (CPI) has reached its highest level since 2008. Rising labour, parts and energy costs coupled with supply-chain issues is having a significant impact on the cost of settling claims.”
Rebuild costs are going up, with construction material costs reaching a 40 year high in November 2021* and materials and labour costs expected to continue to rise into 2023. The reasons for this include the impact of Covid-19, Brexit and supply chain challenges affecting manufacturing
According to the BCIS (Building Cost Information Service), during the latter part of 2021, index-linking rates were around 7.5-8.5% – this compared with 4.5%-5.5% the previous year**
As the rebuild cost increases in line with inflation, the cost of providing the insurance cover will increase, resulting in potential rise in premiums.
The impact on the insurance market
Insurers are also experiencing challenges caused by the current economic climate and other global events. Annmarie Camp, European Head of High Net Worth at Chubb commented, “There are pressures not only for insurers but for many industries. Like many in the market, we see the pressure of mounting inflation. We work to keep up with trends and to help brokers and their clients craft the right coverage. The second key issue is related to supply chain pressures. There is a lot of demand for raw materials around the world. The implications of the pandemic and now the war in Ukraine are causing delays on materials and parts to repair homes and cars.”
What you can do
The most important thing when it comes to insurance is making sure you have the right amount of cover – and this applies to both your business and your personal insurance arrangements.
RebuildCostASSESSMENT.com (RCA) appraises more than 2,000 commercial properties every year, from shops and hotels to offices and factories. Their data shows that more than 84% are either over or underinsured.
And when it comes to residential properties, of more than 3,000 homes assessed each year, RCA’s data shows that more than 90% of them are insured for the wrong amount.
In other words, you could be paying too much for cover you don’t need – or you may not have the right amount of protection in place, which could be costly in the event of a claim.
Advice that makes a difference
If you have any questions or concerns regarding your insurance cover and the effect of index-linking, do not hesitate to get in touch.
We’re here to help you understand the risks you face and make sure you have the right solutions in place to meet your specific needs so your insurance responds when you need it.
* Based on the annual growth of the BCIS Materials Cost Index