Rise in Index Linking percentages

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Rise in index linking percentages

Many UK Property Owners insurers are about to impose dramatic increases in the index linking percentage rate, which is the amount premiums rise annually to reflect the growing costs of reinstatement. The rise is mainly driven by the increase in labour costs for building trades, as the demand for builders outstrips supply in our growing economy. Consequently, there is no longer any spare capacity in the building industry, leading to increased labour costs than previous years.

In the last 12 months, insurer index linking has remained in the 2.5% to 3.5% range, which varied depending on the insurer and type of property (whether commercial or residential). As of November 2014, some insurers are increasing this to 7%-8%.

Increase in premiums
As a result, property insurance premiums, based on the reinstatement cost of the insured building, will increase by a much greater degree than previous months, reflecting the increased exposure to the insurer.

The rise in index linking rates, coupled with premium increases driven by underwriting losses, will mean that some premiums will increase by more than 10% in total despite no claims occurring on the risk.

Steps for you the customer

If you are unhappy with your renewal premium, you can explicitly request that your re-instatement value be changed.
Although, it is important that you submit an accurate rebuild value to ensure you are not underinsured. The steps we can suggest are:

1 Visit the RICS website
This will give an approximate rebuild value, however it is not 100% accurate. Therefore, if the RICS re-build value reflects a huge difference; it is worth moving forward with step two. Visit the RICS website here
2 Professional property survey
A registered property surveyor will provide an accurate rebuild cost
3 Request a reduced re-instatement cost with the insurer
As your insurance broker, we can submit this revised re-instatement cost to the insurer

Understanding index linking

What is index linking?
Most property insurance policies automatically include index linking. This is where the policy re-instatement value is increased at renewal in line with the average rise in building costs which includes inflation, labour charges and materials.

Index linking applies an overall percentage to the reinstatement value that takes into account inflationary costs. For example, if index linking is at 3%, and the original reinstatement value is £100,000, the revised reinstatement value applied at renewal would be £103,000.

Reinstatement Value
The onus is on the policy holder to ensure the reinstatement value is correct at first instance, by using a registered property surveyor. This reinstatement value would remain static without index linking, therefore this helps ensure the property insurance is up to date and prevents underinsurance.

Review of reinstatement value
It is imperative that the original reinstatement value is correct because index linking relies on the initial value disclosed at inception of the policy. It is recommended that a full property survey should be carried out every five years. A wider review of index linking should be considered if the property has specialist materials or may be subject to regional variations.

Who sets index linking rates?
The Building Cost Information Service (BCIS) by the Royal Institute of Chartered Surveyors (RICS) provide the most common House Rebuilding Cost Index, on behalf of the Association of British Insurers (ABI).

BCIS then release a monthly percentage based on their calculations. This is then applied by insurers who provide Property Owners insurance.

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