Construction prices do not ask the building before they rise. Re-covering a roof, replacing a riser or restoring a façade sits at a different level of cost today than a few years ago – and the building's sum insured has to follow, otherwise the cover quietly falls behind reality. There are two tools for keeping up: indexation at the renewal date and a deliberate increase of the sum. This article is the expanded successor to the quick-guide piece.
- Indexation is the adjustment of the sum insured and the premium at the renewal date, meant to follow the change in construction costs.
- Rejecting it saves premium in the short run, but over time it can let the building slide into underinsurance – so the decision is not financial small change, it is a question of cover.
- Indexation solves a lot, but not everything: the building's own changes (refurbishment, extension, solar panels) have to be reported separately.
How does indexation work?
At the renewal date the insurer typically offers (or, under the policy terms, automatically applies) an increase of the sum insured by an index – the index is typically tied to the change in construction costs. The premium changes proportionately along with the sum. The exact mechanics – automatic or subject to acceptance, which index, from when it takes effect – differ from insurer to insurer: you will find them in the policy terms and in the renewal notice. The manager's job is to make sure that notice does not end up in the “I'll look at it later” pile.
Accept it or not? A good decision frame
The temptation is understandable: rejecting indexation saves premium immediately. Except that in the other pan of the scales sits the risk of underinsurance: after a few years of consecutive rejections, the sum can fall meaningfully short of the true value, and a claim may then bring proportional settlement. So the right frame is not “shall we accept the increase” but “is the sum at the true value”. If the amount is based on a recent survey and the index looks excessive, overriding it is defensible; if the origin of the amount is hazy, rejecting the index is flying blind.
What indexation cannot do
The index follows general cost changes – it cannot see the building's individual changes. If solar panels have been installed, a storey has been added, or the building systems have been fully modernised, that has to be reported and carried through into the sum: this is the territory of a mid-term increase of the sum insured. The renewal routine therefore has two lines: an index decision plus a list of changes. In ready-made form: the annual checklist.
How should it be taken to the general meeting?
At general meetings, indexation often appears in the frame of “the insurer is putting the price up again” – when in reality it is maintenance of the building's cover. A well-prepared agenda item has three elements: what the index is and why it is at that level; where the sum would stand without it compared with the true value; and what the proposal is. The article on the annual report and the general-meeting pack provide ready-made building blocks for this. Value maintenance is not an exciting topic – but it is exactly what separates a building that is insured on paper from one that is genuinely insured.
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