Let’s talk insurance: From indexation and inflation to reinstatement valuations and long-term undertakings

AUTHOR: KEVIN RICHARDS, TECHNICAL BROKING DIRECTOR AT BHIB INSURANCE

Insurance, in the simplest form, exists as a means of protection. It provides risk management, support, and essential cover during those unexpected moments. It’s there for you when the unthinkable happens, but its complexities can confuse.

Index linking

Index linking is an important feature built into many UK insurance policies. It ensures that policyholders’ declared values, and sums insured, automatically track the effects of inflation at each annual renewal, according to recommendations proposed by relevant UK price indices.

Recent surges in prices affecting repair/replacement materials, increasing labour costs and the effect of shortages in supply have pushed these indices to their highest levels for some years. Whilst the effect on insurance premiums is proportional and increasingly noticeable at renewal time, there is a very good reason why this happens.

Reinstatement valuations

If you own property, you want reassurance that (should the worst happen) you know precisely how much a rebuild would cost. To gauge the rebuild/reinstatement cost, professional reinstatement valuations for buildings are highly recommended and should be conducted every three years. These provide appropriate values for policyholders to declare to insurers and are subsequently annually index-linked for sums insured to keep pace with inflation.

Reducing or removing index-linked values your insurers apply may save a little premium, but it is a potentially damaging false economy. If buildings have been valued within the last three years, and those declared values subsequently index-linked, insurers will not usually apply the Condition of Average in case of a claim. This common insurance condition serves to penalise policyholders who undervalue and underinsure their property. Councils can ill afford to supplement proportionally reduced claims settlements.

Long-term undertakings

Index linking uplifts apply to insurance policies, regardless of Long-Term Undertakings. These agreements are typically entered into between policyholders and insurers for a three-year period, resulting in a small premium discount and a promise that both parties will renew with one another. Furthermore, they will serve to hold the underlying rate of premium steady, so long as there are no claims, changes in the policyholder’s operations/activities, or changes which insurers cannot influence, such as the rate of UK Insurance Premium Tax (IPT).

In addition to the aforementioned, annual renewal premiums will be seen to rise proportionately during the period of the agreement as a result of the addition of index-linked increases to qualifying sums insured, although the underlying rates applied remain constant. These actions do not serve to break these agreements and are there to ensure that a policyholder’s insured values are protected and maintained.

This is by no means an all-inclusive tour through the world of insurance, but we hope this article has helped shed light on a few terms you will undoubtedly come across. If you have any questions or queries on any of these topical matters, please contact BHIB Councils Insurance for further information at .