Index linking and home insurance – what do you need to know?

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.