As build materials continue to see price increases and the associated inflation of building costs, we consider what this means from an insurance perspective and how insurers can protect their customers from finding themselves in a position of underinsurance.
What is happening to the costs of build materials?
Construction material costs are continuing to rise for the following reasons:
- Reduced manufacturing capacity
- Shipping difficulties
- Insufficient HGV drivers
- Increased demand from UK consumers
Shortages saw prices for repair work materials up 26.2% year on year in October 2021, according to statistics from Department for Business, Energy, and Industrial Strategy. Steel, wood and concrete prices and availability are all real tangible problems for the construction sector. Whilst the costs of materials are only part of prices to carry out works if you can find a builder not increasing tender prices by 20% you will be very lucky indeed.
What does indexation mean in insurance?
Indexation is the amount that is used to increase the amount of insurance cover you have on an annual basis, to help combat the effects of inflation and under insurance.
For example, on a property or buildings insurance policy most policy conditions will require the sum insured to be the full rebuild cost of the property. As the insured it will be your responsibility to provide a correct figure. Due to inflation this rebuild cost will vary from year to year and this is where indexation comes in. It is a figure which is used to adjust the sum insured year to year and as a policy renews.
Due to building material price increases and building cost inflation due to the factors we discussed above, we are beginning to see insurers uplifting the indexation they are using on property insurance. Note that the premium will also increase each year, to reflect the increase in policy benefit and the sums insured.
What changes are insurers making to indexation because of building cost inflation?
By way of example NIG have uplifted on their Property Owner policies from a flat rate of 3% to 9.51% on Buildings and 12.7% on contents. But given the building cost inflation that we are seeing, one obvious question being asked is….is this enough!
To understand the cost to rebuild, brokers and underwriters are reviewing sums insured to reflect the cost and speed issues in dealing with a property loss. If you add to the mix the globalised localised impact of weather related losses to the supply chain and then similar to properties exposed to weather in densely populated UK areas, you do indeed have the perfect storm.
What impact does this all have on the end consumer?
If you are taking out buildings or contents insurance, then ultimately it is your responsibility to ensure that you have adequate levels of insurance cover and that your insurance cover reflects the most up to date circumstances.
As an insured, you need to be mindful of cost inflation. If your policy follows indexation this amount should be updated year to year but check this with your insurer or work with your insurance broker. The BCIS also recommends that rebuild costs are checked regularly (at least every 5 years) rather than relying solely on indexation.
Without the correct level of cover or sums insured you may find yourself in a position of underinsurance if you do come to claim, which could affect your claim and any associated insurance pay-out.
Which higher indexation and the need for increasing sums insured, we may see premiums increasing to reflect this greater level of cover.
The Insurance Act 2015
It would be remiss not to mention the Insurance Act 2015. Charging additional premium is not a remedy available to insurers under the Act.
Under the Act, if an insured’s failure to make a fair presentation is not deliberate or reckless and the insurer would have charged additional premium if it had been aware of the relevant material facts, the insurer hasthe right to reduce the amount to be paid on any claim during the period of cover in proportion to the amountof premium that would have been charged.
The most common example of this would be underinsurance of a building or contents. This remedy is oftenreferred to as ‘proportionate reduction of claim’ or ‘’proportional settlement’.
There are examples of major insurers who have ‘opted-out’ of the proportionate reduction of claim(s) remedy under the Insurance Act 2015. Rather than reducing a claim proportionally, they have instead decided to charge the additional premium that would have been charged if they had known the relevant material facts and pay any claim(s) in full (IF an insured’s failure to make a fair presentation is NOT deliberate or reckless.)
Working with an insurance broker can give you additional peace of mind when arranging your insurance. As insurance experts, we understand the terminology, the complexities, the small print, the detail. We also understand emerging insurance risks and factors which may impact your policy and required cover. Insurance is complicated. So why go it alone? Chat to one of our team at Anthony Jones today to see how we can help you.