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Inflation, index linking and insurance

90% of people are either over or underinsured on their property.

We’re all experiencing challenges caused by the significant increases in the cost of living. It’s now a frightening amount to fill up at the petrol station and recent data suggested that the average annual grocery bill went up by £380 with inflation at its highest rate in 13 years. These increases have been affecting pretty much every area of our lives – including insurance.

What is index linking and what has it got to do with insurance?

Many policies include index-linking, which helps to keep sums insured in line with increasing values. 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
and haulage.

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.


“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.”
Annmarie Camp, European Head of High Net Worth at Chubb
“Inflation is impacting our claims costs in a very similar manner to how its impacting costs and price inflation in society generally. At the same time, Brexit and the Ukrainian war are also impacting many parts of the claims supply chain and making it more difficult to access specialist building skills and for motor, accessing parts. We are fortunate that we have incredibly strong, longstanding relationships with our existing supply chain partners, and we are working closely with them to manage clients’ expectations and offer a solution focused service.”
Sara Simmons – Head of High Net Worth for Covea

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.

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. (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