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Insurance brokers offering Property Owners insurance should have a thorough understanding of index linking and the imminent changes that will affect the property insurance industry.

Rise in index linking percentages

Many UK Property Owners insurers are about to impose dramatic increases in the index linking percentage rate, which is the amount premiums rise annually to reflect the growing costs of reinstatement. The rise is mainly driven by the increase in labour costs for building trades, as the demand for builders outstrips supply in our growing economy. Consequently, there is no longer any spare capacity in the building industry, leading to increased labour costs than previous years.

In the last 12 months, insurer index linking has remained in the 2.5% to 3.5% range, which varied depending on the insurer and type of property (whether commercial or residential). As of November 2014, some insurers are increasing this to 7%-8%.

Increase in premiums

Property insurance premiums, based on the reinstatement cost of the insured building, will increase by a much greater degree than previous months, reflecting the increased exposure to the insurer.
The rise in index linking rates, coupled with premium increases driven by underwriting losses, will mean that some premiums will increase by more than 10% in total despite no claims occurring on the risk.

The challenge for insurance brokers

Policy premium prices rising by a significant amount will mean that customers are more likely to search the market for cheaper Property Owners policies, increasing the likelihood of a change of insurer via another channel. Retaining these clients becomes a certain challenge for insurance brokers.

Insurance brokers should mirror the policyholders existing insurer index linking rating, regardless of a change of insurer at renewal.

Retention advice

See our brief guide below on how you can retain your customers.

Steps to retain your customers

If your clients are dissatisfied with the renewal premium, they can explicitly request the reinstatement value to be changed.

It is important that your clients submit an accurate rebuild value to ensure they are not underinsured. The steps to suggest are:

  1. Visit the RICS website
    This will give an approximate rebuild value, however, it is not 100% accurate. Therefore, if the RICS re-build value reflects a huge difference; it is worth moving forward with step two. Visit the RICS website here
  2. Professional property survey
    A registered property surveyor will provide an accurate rebuild cost
  3. Request a reduced reinstatement cost with the insurer
    As the insurance broker, you can submit this reinstatement cost to the insurer

Understanding index linking

What is index linking?
Most property insurance policies automatically include index linking. This is where the policy reinstatement value is increased at renewal in line with the average rise in building costs which includes inflation, labour charges and materials.

Index linking applies an overall percentage to the reinstatement value that takes into account inflationary costs. For example, if index linking is at 3%, and the original reinstatement value is £100,000, the revised reinstatement value applied at renewal would be £103,000.

Reinstatement Value

The onus is on the policy holder to ensure the reinstatement value is correct at first instance, by using a registered property surveyor. This reinstatement value would remain static without index linking, therefore, this helps ensure the property insurance is up to date and prevents underinsurance.

Review of reinstatement value

It is imperative that the original reinstatement value is correct because index linking relies on the initial value disclosed at the inception of the policy. It is recommended that a full property survey should be carried out every five years. A wider review of index linking should be considered if the property has specialist materials or may be subject to regional variations.

Who sets index linking rates?

The Building Cost Information Service (BCIS) by the Royal Institute of Chartered Surveyors (RICS) provide the most common House Rebuilding Cost Index, on behalf of the Association of British Insurers (ABI).

BCIS then release a monthly percentage based on their calculations. This is then applied by insurers who provide Property Owners insurance.

Contact Stride Underwriting

If you have any further questions on the new index linking rates and would like further advice, please contact your account manager directly or call head office on 023 9224 8790.

Find out more about the Stride Underwriting schemes

Contact us on 023 9224 8790 or contact your local account manager, who will happily discuss our facilities in detail.

Download article as PDF here: Index linking – retaining your customers in a time of rising premiums