Why are property owners’ insurance premiums rising?

With the UK inflation rate hitting a 40-year high of 10.1%, the risk of underinsurance has rarely been higher. Insurers base property premiums on the rebuilding cost of properties, which is set to increase until at least the end of 2022.  

According to the Building Cost Information Service (BCIS) Materials Cost Index, the cost of raw materials in the UK is expected to more than treble in 2022, resulting in increased rebuilding costs for properties. This figure had already increased fivefold during the Covid-19 pandemic, going from -0.9% in 2020 to 4.8% in 2021: a 40-year high, according to the Royal Institution of Chartered Surveyors’ (RICS) analysis of figures from the Office for National Statistics (ONS). The BCIS Material Cost Index is forecasted to reach 17.5% by the end of 2022.

What do these price increases mean for property owners’ insurance?  

Most insurers index-link rebuilding and contents sum insured at renewal to reduce underinsurance in the event of a claim. Insurers adjust premiums using data from the Royal Institute of Chartered Surveyors (RICS), the Association of British Insurances, and the Office for National Statistics. With the BCIS Material Cost Index predicted to increase to 17.5% by the end of this year, property owners can expect to see their insurance premiums rise in line with market conditions.  

Dean Calaz, Regional Managing Director, Corporate and Commercial, Kerry London, said:

“We’re all familiar with the reasons for these dramatic price increases, and we recommend property owners reassess their property rebuild costs to ensure they’re fully protected. We recommend using an RICS surveyor to evaluate property rebuilding costs and working with a broker as early as possible to allow time to secure the best insurance for the most competitive price.“

Preventing underinsurance

The critical issue for property owners is having the correct insurance in place to protect their investments. Responsibility for providing accurate property rebuilding costs lies squarely with the landlord. While brokers and insurers have always stated the importance of having the correct rebuild values on the insurance proposal, they may advise that it’s an essential part of the renewal process to prevent underinsurance. Using an RICS surveyor to provide an up-to-date valuation should ensure the final rebuild figure reflects the ongoing building cost increases. If the sums insured are lower than the full value of the insured property, the claims payment may be proportionately reduced.  

Why does being underinsured matter? 

Being underinsured generally means a lower insurer payout in the event of a claim. If a building is insured for £300,000, but the actual rebuilding cost is £600,000, the claims payment could be reduced by 50%. Underinsurance is a real problem in the UK, research from Rebuild Cost Assessment has found that 80% of UK properties are underinsured. The impact of unpredictable weather patterns due to climate change means properties are exposed to a greater volume of high-value claims such as flooding.

How to mitigate these increases 

1. Talk to a broker to start the renewal process early to allow the time to find the best cover. Insurers may ask detailed questions about things such as the construction of the property, and sometimes they take longer to consider what premiums or terms they are going to offer. Start early and provide as much information as possible to ensure the property is fully covered.  
2. Work with a broker who has access to markets that provide the best possible cover and renewal premiums. 
3. Look for an insurer who does not have an average clause within their policy. An average clause will only pay the amount insured, leaving the owner out of pocket in case of a claim.   
4. Arrange a survey for building reinstatement costs It’s very competitively priced, quick, and carried out by an RICS qualified surveyor. Having the correct amount insured means that in the event of a loss, no one is inconvenienced by a prolonged inability to trade.  
5. Insurers need to be kept up to date with the tenants in the property. Different occupations attract different terms and can result in increases or reductions in premiums or different terms. 
6. Adding loss of rent cover to a property owner’s policy could be beneficial in case of a large claim that may leave the property unoccupied for a long period.  
7. Ensuring rent is calculated correctly and allow for additional tenants and an increase in rents over the indemnity period.  

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Kerry London is authorised and regulated by the Financial Conduct Authority. The company is a leading UK independent and Lloyd’s accredited broker, which means that we work with a wide range of niche and major insurers.

This note is not intended to give legal or financial advice, and, accordingly, it should not be relied upon for such or regarded as a comprehensive statement of the law and/or market practice in this area. In preparing this note, we have relied on information sourced from third parties, and we make no claims as to the completeness or accuracy of the information contained herein. You should not act upon information in this bulletin nor determine not to act without first seeking specific legal and/or specialist advice. We and our officers, employees or agents shall not be responsible for any loss whatsoever arising from the recipient’s reliance upon any information we provide herein and exclude liability for the content to the fullest extent permitted by law.

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