Claims inflation and pressures to rates on home insurance

For several months, we have experienced an increase in renewal premiums across our panel of insurers, well beyond the norm that we have previously seen.

It is likely you are seeing this across the board from insurers so we wanted to share some background to current claims inflation and give some reason why customers may be seeing significant increases in premiums at renewal, even after the ban on ‘price walking’.

What is claims inflation?

This is the change in the average price of materials and labour used in repairing and rebuilding a property following damage.

Various factors are contributing to the recent upwards trend in claims inflation which, in turn, is resulting in higher index linking figures than seen in recent history.

So, what is index linking?

Index linking is the method used by insurers to increase Buildings and Contents sums insured at each renewal to allow for the effects of claims inflation.

This should ensure that customers are not left in a position where they are underinsured.

Most insurers index link sums insured according to inflation as measured by BCIS (the Buildings Cost Information Service) which is a rebuilding cost index calculated for the ABI (Association of British Insurers).

NB: A lot of policies now offered are sold on a ‘bedroom rated’ basis in the intermediary market but there are some that are sold on a “sum insured” basis and historically sold policies could also be affected.  

There has been a steep increase with Index Linking and in the months between end 2021 and mid 2022, the rate applied went from 2.5% to nearly 11%.

Why is claims inflation so high?

There are several factors that have impacted on claims inflation:

Brexit, the COVID-19 pandemic, and the war in Ukraine have led to a lack of building materials and labour and have all added to a significant increase in the price of both.

Changes to building regulations have also pushed up rebuilding costs and have made it more expensive to rebuild properties to ensure compliance with the new requirements. Lockdown also created a huge surge in DIY projects, adding unprecedented demand to the supply chain, driving up the cost of materials.

Other factors such as inflation, longer lead times and supply chain issues, and increased material costs have pushed up the value of many items with the result being higher than normal index-linking increases.

Why is property claims inflation so much higher than general inflation?

General inflation will take into account other items such as food and household bills.

Whilst these items will still face significant pressure due to supply chain issues within those industries and are contributing to the cost of living issues we all face, the increase in cost of raw materials used in construction are wholly unprecedented, at closer to 20%. 

Is this just another way of increasing insurance premiums?

No, index linking is an essential tool used to protect the financial interests of clients against the effects of inflation.

It is imperative that customers with sum insured policies are not left in a position where claims costs are not met, due to a property being underinsured against the true costs of repair and/or rebuilding.

How does this impact new business, as compared to renewals?

As previously mentioned, most of the insurers on the Assurant panel offer a bedroom rated solution with a set level of cover for Buildings and Contents which is then rated on other factors such as postcode, property type, year of build and of course, number of bedrooms.

Industry challenges continue to drive up the cost of building repair and reconstruction, both in the UK and globally, with little respite expected in the overall supply chain any time soon.

What can we do?

Mortgage and financial advisers have a duty to customers to assess and review insurance needs, even more relevant now in light of Consumer Duty.

At a time when we are all looking at our outgoings, customers can really benefit from an adviser who continues to stay in touch to advise (and educate) on an ongoing basis rather than simply selling them insurance as a one hit wonder.

Our message to you would be “Before your customers renew, offer a review”

• Work on a contact strategy - Encourage customers to let you know of any significant changes to their circumstances straight away.
• Contact with your customers – If you haven’t spoken to them, maybe look at 3-4 weeks before their policy renews.
• Review - Look at their policy, what they have, what they need and how much they are paying.

By doing this you will be better placed to make sure the cover they have is correct and also offer insight on insurance products they may not even realise they need.

We hope you find this additional information helpful and supportive for inevitable questions you may receive around increased premiums and help with their understanding of the claims inflation issue affecting the insurance industry.