β‘ What is index linking/indexation?Index linking is an essential tool insurers use to protect clientsβ interests. The indexation applied to policies, is designed to allow for the annual effects of claims inflation, so the sum insured reflects the true value of reinstatement. One index such as the rebuild cost or the materials index, shown below, allows for the increases in costs of rebuilding a property following damage which would influence the cost of settling a claim following damage to the property. These increases ensure that you are not left in a position where you are underinsured against the actual cost of rebuilding the property.
With buildings insurance, the declared value is the rebuild cost of the property from day one (known as Day One Reinstatement) which should be accurately valued at the outset to avoid underinsurance. The sum insured, is the declared value (rebuild cost) plus the inflationary increase to allow for the period of time it would take to reinstate the building. Insurers apply the indexation to your policy to adjust this sum insured at renewal (providing this was accurate at the start of your policy) to allow for the annual claims inflation.
This will be a larger increase than usual due to the large increase in claims inflation.
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What is claims inflation and how does it affect your insurance premium?