Why index linking is important for your clients
“Inflation is at its highest level for thirty years and, within that, material prices are the highest they have been for over forty years. Says Nick Hobbs, chief distribution and regions officer at Allianz.
Given that context, index linking for residential and commercial buildings has never been more relevant. Either that or regular and disciplined sums insured reviews. Buildings need to be insured for the correct amount if the client is to avoid underinsurance and the potential for an ensuing claim shortfall, existential business threat and difficult conversation with their broker partners.”
Influences of inflation
There are many reasons for the current high rate of inflation, mainly due to the dual impact of Brexit and the pandemic.
Read our article that looks at some key areas influencing inflation.
What’s the reason for index linking?
Index linking is applied by insurers to ensure that an asset’s insured value is adjusted in line with changes in inflation, deflation and the cost of living. It’s commonly used in buildings insurance to calculate the difference between the sum insured and a property’s rebuild value. However index linking is not limited to buildings. Changes and developments in the macroeconomic environment can affect the value of other assets, such as stock, materials and parts.
Insurers use various indices to calculate index linking, including the Consumer Price Index (CPI) and Retail Price Index (RPI). For both residential and commercial buildings insurance many insurers refer to information provided by the Building Cost Information Service (BCIS), which operates under the Royal Institute of Chartered Surveyors (RICS). The BCIS uses a number of factors in their calculations including the cost of labour, materials and professional fees.
Index linking is undertaken to protect against the risk of underinsurance, where a policyholder may find they are responsible for a percentage of the total loss due to their asset not being insured for its full value. By applying index linking, the sum insured is automatically updated (usually increased) in line with economic changes when the policy renews. Whilst the policyholder will only see a price change at renewal, most policies are index linked on a monthly basis.
Here is the index linking figures for one of our capacity providers: