The missing link: index linking explained
Recruitment combined insurance policies should include optional cover for the property with automatic index linking. This is where the policy re-instatement value (sum insured) is increased at renewal in line with the average rise in building costs, taking into account any inflation, labour charges and materials.
Index linking applies an overall percentage to the reinstatement value e.g. if index linking is at 3%, and the original reinstatement value is £100,000, the revised reinstatement value applied at renewal would be £103,000.
The onus is on you, the policy holder, to ensure the reinstatement value is correct at first instance, by using a registered property surveyor. Index linking helps ensure the property insurance is up to date and prevents underinsurance.
Review of reinstatement value
It is imperative that the original reinstatement value is correct because index linking relies on the initial value disclosed at inception of the policy. It is recommended that a full property survey should be carried out every five years. A wider review of index linking should be considered if the property has specialist materials or may be subject to regional variations.
Who sets index linking rates?
The Building Cost Information Service (BCIS) by the Royal Institute of Chartered Surveyors (RICS) provide the most common House Rebuilding Cost Index, on behalf of the Association of British Insurers (ABI). BCIS release a monthly percentage based on their calculations. This is then applied by insurers who provide Property Owners insurance.
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