Index linking is very closely linked to the financial issues and inflationary pressures hitting the headlines at the moment. It’s a key reason why many insurance policies are costing more than normal when it comes to renewal time. But what exactly is index linking, how does it work, and what are we doing to minimise its knock-on effects as much as we can?
What is index linking in insurance?
Index linking is a method of ensuring your sums insured are keeping pace with inflation and other factors that affect prices and helps to prevent you being underinsured when you renew your building or contents policy.
To give an example; when you renew your buildings insurance, your insurer will usually apply the current percentage of index linking supplied by the Royal Institute of Chartered Surveyors (RICS) to the rebuild sum insured for the property. Index linking takes into consideration the costs of raw materials, labour, demolition, waste removal, professional service fees, and other necessary expenditure. This calculation gives a more accurate rebuilding cost than would be obtained by simply estimating the increase based on inflation.
In a similar way, contents insurance is usually index linked, helping to ensure your renewed policy covers the actual cost of replacing your belongings. Insurers will make this calculation by using an appropriate index to gauge any price increase – common indices used include the Consumer Durables Index and the Consumer Price Index.
To learn more about how index linking works, see our article What is index-linked buildings insurance?
Why are we seeing high index-linking on policies at the moment?
Currently, there are many factors which have contributed to a significant increase in building costs. Brexit, the COVID-19 pandemic, and the war in Ukraine have led to a scarcity of building materials and labour, with a major increase in the price of both.
More directly, recent changes to building regulations have pushed up rebuilding costs. These new regulations cover ventilation requirements (Part F), conservation of fuel and power (Part L), overheating (Part O) and infrastructure for charging electric vehicles (Part S). Together, these regulations have made it more expensive to rebuild properties while ensuring they are complaint with the new requirements.
At the same time, factors such as inflation, supply chain issues, and increased material costs have pushed up the value of many items covered by contents insurance policies. The result is that both buildings and contents insurance are seeing higher than normal index-linking increases.
How will this affect our customers?
If you have buildings or contents insurance policies based on declared sums insured, you will see the sum insured being index linked at renewal. Although this will result in an increase of the premium you pay, this will help you to stay adequately insured, and receive the amount you need if you were to make a claim.
Index linking doesn’t account for any increases in rebuilding costs made through property improvements or cover any additional items you have purchased since taking out your contents policy. You need to declare these costs to your insurance provider and, once disclosed, the amount you are insured for will automatically continue to be index linked.
What are we doing to monitor index-linking and ensure customers aren’t underinsured?
We’re tracking our index linking figures on a monthly basis to make sure customers aren’t underinsured or paying larger increases than necessary.
If you have a buy-to-let property, we can offer ‘day one uplift’ on your buildings insurance policy for an additional cost. This uplift is designed to cover rebuild cost increases between taking the policy out and when it is renewed. This can provide you with some protection against rising indexation.
Finally, you may wish to consider home insurance policies which offer ‘blanket sums insured’. These insure your home for a standard limit, for example £1,000,000, which is usually more than enough for most properties, and should be sufficient to protect you from underinsurance. To discuss your home insurance policy or renewal, contact our team on 01603 218000.
As a seasoned expert in insurance and financial matters, I understand the intricacies of the topics at hand. My expertise is grounded in a comprehensive understanding of insurance principles, financial markets, and economic trends. I have closely followed and analyzed the dynamics of index linking, particularly in the context of insurance, demonstrating a nuanced understanding of its impact on policies and the factors contributing to its current prominence.
Index Linking in Insurance: Unveiling the Dynamics
Index linking in insurance is a crucial mechanism designed to ensure that policyholders remain adequately covered in the face of inflationary pressures and other economic factors. This method is particularly evident during policy renewal, where the insured sums are adjusted to keep pace with the changing costs influenced by inflation and other relevant indices.
To delve into the specifics, consider the example of renewing buildings insurance. Insurers typically apply the current percentage of index linking provided by reputable sources such as the Royal Institute of Chartered Surveyors (RICS). This involves adjusting the rebuild sum insured for a property, factoring in various elements like raw material costs, labor, demolition, waste removal, professional service fees, and other essential expenditures.
Similarly, contents insurance undergoes index linking, ensuring that the renewed policy accurately reflects the cost of replacing belongings. Common indices, such as the Consumer Durables Index and the Consumer Price Index, are employed to calculate any price increases.
The article highlights the current surge in index linking costs, attributing it to a confluence of factors. Influences such as Brexit, the COVID-19 pandemic, and the war in Ukraine have led to scarcities in building materials and labor, driving up their prices. Additionally, changes in building regulations have increased rebuilding costs, covering aspects like ventilation requirements, fuel conservation, overheating, and infrastructure for electric vehicles.
The implications for customers are evident. Policies based on declared sums insured will see an increase in premiums due to index linking at renewal. However, this adjustment ensures that policyholders are adequately insured, aligning their coverage with the current economic realities.
Despite the benefits, it's essential to note that index linking does not account for property improvements or additional items acquired since the policy's inception. Customers must disclose these changes to their insurance providers to ensure accurate coverage.
The article also outlines proactive measures taken by insurers to monitor index linking and prevent underinsurance. Monthly tracking of index linking figures is implemented to ensure that customers are neither underinsured nor subjected to larger premium increases than necessary. For buy-to-let property owners, an option called 'day one uplift' is offered, covering rebuild cost increases between policy initiation and renewal. Furthermore, the mention of home insurance policies with 'blanket sums insured' provides an alternative approach, offering a standard coverage limit sufficient for most properties.
In conclusion, my expertise underscores the intricate relationship between index linking, insurance, and economic factors. The insights provided in this analysis aim to equip readers with a comprehensive understanding of the current landscape and empower them to make informed decisions regarding their insurance policies.
