While index-linking of sums insured on buildings offers some protection from underinsurance, it’s not something a policyholder should always depend upon, says Insuranceshortfall.com’s Will Molland…
AN INTERESTING thing happened in the construction sector following the financial crisis of 2008. It is well known that a lot of building work ceased at the time, but a knock-on effect of this was the moth-balling of many brick manufacturing plants.
A few years later when construction work started to pick up again, there was a significant shortage of bricks. Low supply and increased demand meant that the cost of bricks rocketed. Data from the RICS’ Building Cost Information Service (BCIS) shows brickwork costs rising by as much as 26% in 2014 alone, with a 40% increase in the past four years. Brickwork costs in the first two quarters of this year have gone up by 15.5%. Other studies have also revealed huge regional variations in ‘costs per brick’.
How fascinating, but so what you might say?
Here is the relevance. The House Rebuilding Cost Index for example, which is widely used by insurers to make annual revisions to sums insured "is based on an average of house types”. BCIS themselves, who produce the index, recommend “that the rebuilding cost is checked regularly”. This is for a very good reason. The fluctuation in cost of building materials in some areas and for some property types can differ considerably from index-linking, as can the cost of labour. Factor these variations in and over a period of time and underinsurance can become significant, even if a professional assessment has been carried out in the past and index-linking applied.
We are of course going through another period of economic uncertainty as a result of Brexit. We’ve already seen a dramatic impact on imported building materials resulting from the fall in value of the pound and RICS are now warning that a ‘hard Brexit’ could dramatically affect the flow (and therefore the cost) of construction labour. Of course all of this is a bit “uncertain”.
So what’s needed now?
Firstly as BCIS suggests, regular reviews of rebuild costs are essential given the volatility that exists around construction costs and the fact that index-linking cannot be entirely relied upon. Secondly, it is really important to understand the basis upon which any rebuild cost assessments has been carried out, in order to have greater confidence in its accuracy.
At Insuranceshortfall.com we have recently responded to feedback and upgraded our already comprehensive Rebuild Cost Assessment (RCA) report. As well as recommending individual re-assessment periods, Insuranceshortfall.com now includes further information around VAT, a detailed explanation of the calculation and rate used, notes around rebuild periods and an overall improvement in the structure and narrative.
You can download sample copies of the latest version of both our household and commercial RCA reports here.