Indexation & Claims Inflation – How this affects your insurance

You may have read recently that inflation is currently at its highest rate for 30-years – With Brexit, the global pandemic, and now the war in Ukraine, inflation is set to be an estimated 7.25% by the end of April 2022. We are all seeing the effects of this on the wider economy; on energy bills, fuel, raw-materials shortages and, then there is the impact within the insurance industry.

Caused by the aforementioned factors; index linking and claims inflation are resulting in rating increases or higher premiums. In this post, we delve into why these may be causing your premiums to rise.


What is Index Linking?

Index linking (or indexation) is the alteration to an asset’s value, in order to reflect effects of current inflation or deflation.

Insurance companies constantly evaluate data about indices to measure the average changes in the worth of assets. With this data they will apply adjustments to policies in order to ensure that clients’ sums insured have a truer reflection of their value, and so to avoid potential underinsurance.

For example; If your Property Owners policy is index linked, the rebuild value of your building(s) will increase automatically when the cost of raw material, labour and professional service fees rise due to inflation. It is not linked to the rate of inflation per say, it’s linked to the effect that inflation has on the different factors used to rebuild a home. This saves you time re-valuing your property annually. 


What is Claims inflation?

Claims inflation is the variation in the average price of materials and services relative to a portfolio of claims. It estimates the impact of the overall environment (economic as well as social), on the expected claims costs over time.

For example; supply and demand within the construction sector affecting property claims: – Materials required for construction (e.g. bricks, timber, insulation, tiles, steel, copper etc.) are becoming increasingly harder to come by. While we won’t yet see the long-term impacts of the Ukraine war, the pandemic, and Brexit, it’s expected that these will continue to have an influence on prices. (For further information visit: Home Building & Renovating).  The increased prices of the importing and purchasing of raw materials drive up claims costs, but the time delays in the supply also have a negative impact on the claims cost containment, and would be a detriment to the claimant.


It’s important to review your sums insured

Inflation changes and supply-chains disruptions can have an influence on non-indexed sums insured, wage rolls and settlement time and costs for individual claims.

Should you wish to review your sums-insured or discuss any concerns, please get in touch with us at Firth & Scott.