Inflation has been a big topic in recent months, and we’ve all noticed that the cost of just about everything – from gas to groceries – has gone up. Unfortunately, insurance is no exception. But inflation is not the only reason. Property owners, including landlords, are currently facing a perfect storm that is driving insurance premiums up. Here, we’ll explain some of the reasons why.
You may have come across the term ‘index linked’ in relation to economics and finance. Quite simply, it’s a way of making sure that the value of a financial product is protected against rises in costs in the wider economy.
In the case of buildings insurance, index linking typically relates to the rebuild costs of a property, which includes the labour and professional services that are required on top of inflation. By October 2022 at the time of writing, index linking has increased to around 17 per cent in comparison to just three per cent in previous years and four to five per cent at the beginning of 2022, and it is forecast to reach 20 per cent by the end of the year.
Although the increase in index linking is mainly due to inflation, it is considerably higher than inflation. This is due to other factors which include:
The result of all these factors combined is that rebuilding costs are spiralling – the cost of rebuilding a property after it has been damaged has risen dramatically because of escalating materials and labour costs combined with inflation. This affects landlords because landlord insurance covers the cost of rebuilding the property if it is damaged beyond repair.
When premiums are rising, it might be tempting to reduce your level of cover.
However, now more than ever it is important that the rebuilding value of your property is calculated correctly. Failure to do so may invalidate your policy in the event of a claim and you may find yourself underinsured.
This means that any buildings insurance claim settlement will leave you out of pocket. The average degree of underinsurance at the moment is extremely high, at around 80 per cent. This is largely due to the increase in costs of materials and labour, which we have seen recently.
To have the right level of cover, the insurer needs to know the current cost of rebuilding the property.
If you are unsure about the rebuilding value of your property/s, we’d recommend using one of the following options to get an indication of your property’s value:
The benefit of an index linked insurance policy is that you don’t have to review the rebuild cost yourself every time you renew your policy, as it will be automatically adjusted.
It also means that if the cost of insured items such as brickwork, roofing and internal fixtures and fittings, increases during the term of the policy, this rise is automatically covered by your insurance.
At Total Landlord Insurance, our policies are automatically index linked at renewal and we would always make sure your sums insured are maintained at adequate levels. But it’s important that they are adequate in the first place.
Rising inflation and market factors are not the only things affecting insurance premiums at the moment.
After two decades of competitive premiums, relaxed criteria and wider cover, we are now facing a trend in the insurance industry which experts call a ‘hardening’ of the insurance market. The net result of this is that premiums and excesses are increasing.
This is a natural cycle for the insurance market. It’s happened before, most recently after the World Trade Centre attacks in 2001, and it will happen again.
Insurers are seeing an increase in both the frequency and cost of claims across all types of cover due to global issues. Most notable is the impact of climate change, which is causing more severe weather events such as named storms and flooding, as well as reductions in coverage such as flood exclusions.
On top of this, COVID-19 is predicted to be the largest loss on record for insurers.
Premiums are increasing to reflect the frequency and size of claims and the changing nature of risks that property owners are exposed to today. To mitigate this, some insurers may reduce the amount of cover they are prepared to offer, to avoid increasing their premiums.
They may also be more selective about which properties they insure and interpret claims more harshly. The key thing for landlords to understand is that it is crucial to check your insurance cover properly to make sure you’re fully protected and not be tempted to reduce coverage.
Landlords can’t do much to influence inflation, but there are some steps you can take to protect yourself in the current climate and minimise the impact of rising insurance premiums:
For more information read our articles, How to avoid underinsurance: A landlord’s guide and Why landlords need to understand how index linking affects their let.
