Index Linking is a useful tool, but only if used correctly

By Jack Durrant, Associate Director, BA (Hons) ACII and Laura Youd, Senior Claims Handler

Let’s say you’re going on a journey to a specific destination. You leave your home, choose your direction and start walking as the crow flies. And I mean literally – you set off walking along a particular straight line, unincumbered by the need to avoid cars, houses or any other obstacle on your route. You do this without any precise navigational equipment. But the further away the location, the harder it becomes to pick the exact angle you need to walk in to reach it. 

If your destination’s only 30 feet away, a slight error when you set out won’t make much difference – you’ll probably still get there ok. But if you’re heading somewhere 30 miles away, even a slight error in judgment at the outset could mean you have to travel many extra miles to correct your course and reach your destination.

This is an important lesson to learn in insurance: guessing or simply carrying on down the same path when renewing your insurance policy every year will potentially have the same effect. Sure, in the first year, your cover is roughly correct – but without doing a full and proper review of your policy to make any necessary corrections may mean that, in just a few renewals, your policy is miles away from where it needs to be in terms of your sums insured.

Many will be aware of index linking; it’s where a value is increased proportionally according to factors in the economy. Think of the last few years: the value of currency has eroded, resulting in goods that cost more. This has subsequently affected the cost of rebuilding properties.

Index linking is the tool used to assess the shorter-term changes in value for a property, and many claims specialists say it’s a guide rather than a rule. There are so many things that can impact the rebuild of a property which could undermine the average applied by a given insurer, based upon inflation and cost of goods. Things like:

•    Rebuild design cost
•    Debris removal
•    Grade list status
•    New building regulations standards
•    Availability of labour
•    Cost of fuel
•    Access to the location

I say this because insurers might often apply blanket index linking across all of its property risks. For example, they might do this for UK-wide property risks – when the impact on property values in a certain area or with certain characteristics are far more volatile.

You also have other issues. For example, if you are using incorrect numbers in the first place (either if you are slightly over or under your initial valuation) then the gap between the true value and insured value is destined to widen over time.

Again, these fluctuations and impacts of inconsistent index linking can also create another issue when considering the application of average which features in many policies. This is especially bad for those who become underinsured because their claim value is reduced proportionally to the value of underinsurance present in the policy. 
All of these issues mean that you will either pay too much (and increasingly too much if the value is too high to begin with), or too little and face the consequences like underinsurance average in the event of a claim.

But there’s a simple antidote to all these issues. All you need is a plan to assess the recent value of your property.

At Howden, we can provide property valuations through BCH, who will issue you with an up-to-date valuation from an RICs approved assessor, and you can schedule these infrequently at nominal cost to stay abreast of market fluctuations. Where there are regulations or other buildings built close by, then you can also check in on how this might impact the cost of rebuilding. 

It's easier than you think to stay on top of property values, and I would always encourage customers to keep theirs in check over the long-term, so that small issues in values do not become exacerbated over time.