If you’re a property owner then you may have seen the term index linking mentioned on your home insurance or landlord insurance policy and wondered what it meant. At Ashburnham Insurance, we want to help you understand what index linking is, as well as how and why it can affect your property insurance renewal prices.
Property insurance and rebuild value
When purchasing property insurance you are effectively insuring your property based on the cost of rebuilding the physical structure of your house, independent of its market price or property values. It is important to know both the sum insured and the rebuild value of your property because as the policyholder, you must make sure that you keep the sum insured up-to-date, allowing for changes in rebuild costs.
Calculating the rebuild value of your home is necessary for insurance purposes because it is the amount of money required to rebuild your property from the ground up if it is damaged or destroyed in an occurrence such as a fire or flood. The sum insured is designed to cover inflation during the policy period and includes a percentage increase on the rebuild value.
As most domestic property insurance policies require the sum insured to amount to the full rebuilding cost of the property, when it is time to renew a buildings insurance policy, the sum insured will usually increase based on something called index linking.
Index linking is a condition attached to a property insurance policy, which allows an increase in costs on the sum insured at the point of renewal. It is based on inflation for building costs including materials and labour and its purpose is to prevent a property from becoming under-insured.
Index linking offers you comfort in the fact that the sum insured is being increased along with standard levels of building inflation. Having a level of protection against inflation is good, but it does rely on having the correct rebuilding sum insured when the original policy is created and the most effective way to do this is by asking a professional surveyor to undertake a rebuilding valuation report.
How index linking affects insurance costs
Sometimes, insurance costs may remain the same, but because the sum insured has been increased due to index linking, the price for coverage will still be higher, because ultimately more cover is being provided due to the rebuilding costs of the property increasing. Without index linking the sum insured will remain the same, while other costs increase. This could lead to underinsurance and loss in the event of a claims settlement.
More recently, COVID-19 has led to large changes in spending patterns and, in some industries, such as construction, rapid price changes. A common misconception is that insurance renewal prices are increasing due to insurers raising prices, however, COVID has deeply affected index linking rates causing them to spike due to a sharp increase in building and material costs.
Index linking rates have been around 7.5%-8.5% during the last half of 2021, compared to the previous year of around 4.5%-5.5%. A guideline index linking chart can be found at the BCIS House Rebuilding Cost Index, however, most insurers will generally use their own rates.
Index linking and insurance claims
Although the sum insured will only increase when the renewal documents are issued, most policies are index-linked on a monthly basis. So, provided there has not been an unreasonable delay in notifying the insurer, index-linked adjustments should continue from the date that a claim was made through to the settlement of the claim.
Be careful not to rely on index linking to keep your sum insured up to date. Ideally, you need to review your cover every five years. It is also important to make sure that you keep your policies up-to-date by letting your insurance company know if you make any improvements to your home, such as installing a new heating system, building an extension or having any type of conversions made to the property.
Get more advice on property insurance
Remember that all property insurance policies will vary in the cover that they provide and in their small print and so the information provided here is to be taken as general advice. For specific and detailed information regarding your property insurance, you must refer to your own policy.
For more advice call Ashburnham Insurance on freephone 0800 1696137, we are always happy to discuss all aspects of home insurance and landlord buildings insurance, and can provide recommendations based on your particular requirements. We are able to use our years of experience and expert knowledge to ascertain the best options for you.