Why is underinsurance a problem?
Due to the current climate the underinsurance gap is expanding.
We’ve already mentioned that the underinsurance gap widens when the economy is under pressure, and in the current climate we’ve all noticed that the cost of everything – from food to fuel – has gone up. And insurance is no exception. Some of this is down to inflation, but this is not the only reason.
‘Index linking’ is a way of making sure that the value of a financial product is protected against rises in costs in the wider economy. A facility is put in place to track rises in costs – such as inflation and the cost of living – and then a similar percentage increase is applied to the value of the product.
In the case of buildings insurance, index linking typically relates to the rebuild costs of a property, which includes the labour and professional services that are required to rebuild the property, on top of inflation.
Due to a number of factors, index linking has increased rapidly since the beginning of 2022, when it was around four to five per cent.
This affects landlords because landlord insurance covers the cost of rebuilding the property if it is damaged beyond repair.
The Building Cost Information Services (BCIS) house rebuilding cost index showed an 18.2% annual increase to October 2022.
Although the increase in index linking is mainly due to inflation, it is considerably higher than inflation.
This is due to other factors which include:
The cost of materials, which have increased at an unprecedented rate and have reached a 40 year high (according to RICS), with steel prices up by 70%, timber up 35%, roofing materials up 50% and brick prices up by 44%
A shortage in skilled labour, which is triggering wage rises – with some builders reporting a rise of around 25% to attract the skills they need
The war in Ukraine and the impact on energy prices, which has put the construction industry into further turmoil
There are some signs that the situation may be getting a bit better in terms of supply, but not in the short term and much depends on factors out of our control so the situation remains uncertain for the foreseeable future.
I have been working in the insurance industry for more than 30 years. In this time I’ve never seen index linking reach double figures, let alone the figures we are currently seeing, which are heading towards 20%.”
