Setting the correct Building Sums Insured (BSI)
Setting the correct Building Sums Insured for your clients is important. If it’s set correctly, their policy will respond as expected should the inevitable happen, paying out the correct amount to get your client back on their feet.
Rebuilding Cost inflation for the UK in 2022 is estimated at 9.6% (source Building Cost Information Service) and this will be reflected in your clients Insurance premium.
Why is there an increase?
UK construction costs have reached a 40 year high of 20.3%!!!
- Material shortages will continue to create problems, but this could reduce if Covid subsides.
- Labour costs it is anticipated will continue to rise throughout 2022, but at a rate of less than 5%, but only if things come under control in respect of Covid, as skilled workers may feel more likely to return to the UK.
Some materials have seen massive increases: imported sawn wood (+73%) and steel sections (+60%) due to a global increase in construction plus supply issues caused by Covid.
First part of 2022 rebuild costs will continue to escalate:
- First reason is driver shortage in the UK coupled with increased fuel prices– it is costing a lot more to transport goods because of this shortage and the manufacturers have to factor this in on their price.
- Rising energy costs are also increasing rebuild costs. Wood and steel for example utilise significant energy costs in the production of these materials. Rising energy costs have to be passed on.
- Significant infra structure projects will continue to put pressure on the rebuilding cost inflation index.
- There is a Global increase in demand for construction and there are supply issues due to Covid, and this has been reflected in the UK
- Shortage of labour in the construction industry. Randstad stated that the average pay packet for construction workers in the UK increased by 14% in 2020. In some parts of the UK construction firms have reported they are paying 25% more for labour costs to attract the trades they need. Increases in labour costs have been due to increase in demand for construction work as well as less availability of labour caused by Covid and other matters.
So, going back to the fact that Rebuilding Cost inflation for the UK in 2022 is estimated at 9.6% what does that mean for Policyholders?
- 90% of buildings (commercial and residential) do not have the correct Building Sum Insured (BSI)
- 10% to 20% are over insured – often the BSI is based on market value
- 70% to 80% are underinsured – original BSI figure too low and indexation at renewal has not kept pace with construction cost inflation
- The average degree of under insurance is approximately 40%
Consequences of under insurance
- Significant partial or total loss occurs, claim made
- Loss adjusters identify inadequate Building Sums Insured
- Average applied and pay-out reduced
- Policyholders left without adequate funds to reinstate buildings