Index Linking (also known as Indexation) is “the adjustment of an asset’s value to reflect inflation and deflation”. In terms of asset-linked insurance policies such as your Flats Insurance, it’s use means that any pay-out will reflect the current rebuild value of the insured items.
There is always ebb and flow to index linking, but why are figures soaring so significantly this year? Belinda Bagnall, Managing Director of Residentsline explains.
How Does Index Linking Work?
Before we can discuss the reasons for the increase in figures this year, we first need to understand how index linking works. At each renewal of your policy, we will adjust the declared value of the property by applying the index provided by your insurer. Your insurer calculates these indices from data provided by the Royal Institution of Chartered Surveyors (RICS), The Association of British Insurers (ABI) and The Office for National Statistics (ONS).
In recent years these indices have increased at a fairly steady rate, but in 2021, the rate of growth has been far more significant and sustained than what we have been used to. In fact, prices are reportedly at a 40 year high due to a range of factors that have come into play over the past few years and that come to something of a head in 2022.
Reasons for Higher Index Linking
Multiple factors are coming into play- most obvious are the effects of our exit from the European Union and, of course, the Coronavirus pandemic: – A significant rise in demand for building materials following the pandemic, causing increased pricing globally – Escalating shipping prices and delays at British ports causing shortages of crucial parts and materials – An unanticipated surge in demand for renovation works have played a role in creating supply chain challenges and labour shortages – Severe shortages of professionals (architects, legal, planning) – Shortages of insulation, plaster, concrete products and even power tools have been experienced in recent months – Figures from the Construction Products Association (CPA) show that the UK lost more than a quarter of its EU-born construction workforce between January 2020 and January 2021.
Why do we Index Link?
Declared values are index linked to ensure that your assets are consistently valued correctly and are therefore adequately insured at the time of a claim (rather than being insured only for their value at the of the policy start date). Without index linking, you run the risk of your property being underinsured which, in the event of a claim, could leave you high and dry if the costs incurred exceed the maximum that can be settled by the insurance company. Without index linking, you risk a shortfall as a policyholder and serious financial losses for yourself and your fellow flat owners. Occasionally, and contrary to clear advice, policyholders may choose not to index link their policy to obtain a reduction in their premiums. This puts them at significant risk financially and can also void their cover all together.
Ensuring Your Declared Value is Adequate
Your declared value is the amount it would take to cover the full reinstatement of your property, including: – Demolition and clearance of debris – Surveyor and architect fees – Groundwork – Materials and labour – Alternative accommodation – Permanent fittings (e.g. plumbing, built in wardrobes) – Any outbuildings, boundary walls, pathways, gates or fences covered by the policy
The only way to be completely sure that your property’s declared value is to have a professional Reinstatement Cost Assessment carried out on a regular basis. These should be carried out by qualified building surveyors whose activities are regulated by RICS. Your flat is often your biggest asset, it’s important to protect it.
Head to the Residentsline website Get a Quote – Residentsline Limited for information on all of our products and services or, if you’d like to speak to one of our fantastic, specialist team, give us a call on 0800 281 235.
