8th August 2019

Why do insurers index-link my sums insured?

By Steve Moores, Dip CII
Account Executive
Row of English houses

Unless you have a “blanket” sums insured policy, you will likely find that at your next renewal, your insurer has index-linked both the buildings and contents sums insured. Some insurers also index-link art and valuables. Index-linking, also referred to as indexation, is the application of a percentage increase in your sums insured at renewal to protect you from inflation. The practice began in the UK in the 1970s during a period of high inflation. Policyholders with large claims, particularly those affecting the buildings, found that the amount paid was not enough to put them back in the same financial position they were in before the claim. This principle of indemnity goes to the very heart of insurance.

In order to counteract the issue of inflation, insurers will increase your sums insured by a percentage each year. Indeed, many insurers do this monthly, without charge.

Most insurers’ building index-linking is based on the BCIS House Rebuilding Cost Index. Many insurers review this data internally, using their own statistics as well as other external factors, such as the cost of timber and stone and labour costs, which can vary from area to area. Older properties are particularly affected by the cost of specialist materials and labour. Some insurers, such as Ecclesiastical, have developed their own indexes to ensure that policyholders are not left out of pocket in the event of a claim.

With regards to contents, most insurers will index-link this figure in line with the Retail Prices Index (RPI).

Some insurers will also index-link policyholders’ art, antiques and jewellery. This is a less reliable method of ensuring the correct level of insurance as it isn’t fool-proof, with some categories, such as good diamonds and Rolex watches, significantly outperforming the market, whilst others underperform or even reduce in value. This is why it’s important to obtain a fresh valuation at least every five years so that if a claim happens, you receive enough from the insurer to replace like for like.

We recommend the following valuers:

Doerr Valuations – www.doerrvaluations.co.uk

The Chester Valuation Company – www.chestervaluation.co.uk

Gurr Johns – www.gurrjohns.com

Quastels www.quastelassociates.com/

For more information, visit www.astonlark.com/personal or speak to your account handler.