A number of insurers across the market use what’s called ‘index linking’. In its simplest sense, this is a tool within commercial insurance policies that provides a buffer, catering for inflation and helping to avoid underinsurance.
Below, we dive deeper into what index linking is, why it’s applied, and what it means for you and your policy premium.
What is index linking?
Insurance policies that incorporate property cover, such as those for buildings, contents or portable equipment, often include a clause stating that index linking will apply to values insured at each renewal.
This means that when cover is renewed, index linking takes effect, automatically increasing the values stated within the policy for property insured. The only property type that isn’t usually uplifted in this way is stock, as it’s insured slightly differently.
For the policies where index linking applies, it typically raises these values by 2.5–5%, which, for the most part, has been sufficient to reflect inflation.
Why is it applied?
Index linking helps an insured business avoid underinsurance, which has the positive knock-on effect of reducing potential disputes between the business and its insurers. If the property is ever damaged and needs to be replaced, you’re protected from costs that may have increased over time. Here are two examples of how it works:
You’re a Steadicam operator who insures £25,000 of camera equipment on your current policy. Prior to your renewal date, you receive your new terms, but notice that the equipment value now shows a sums insured of £25,625. This is index linking in effect, uplifting your insured values by £625.
You’re a landlord who currently insures a building that has a rebuild valuation of £155,000. At renewal, your terms arrive with the new value insured of £159,500. Again, index linking has been applied, uplifting your insured values by £4,500.
In both scenarios, potential inflation has been taken into account, so you’re less likely to be accused of underinsurance if a claim occurs.
Why is it important?
As well as providing peace of mind that your equipment, contents and building are insured for an appropriate value, index linking reduces the risk that the amount paid out for your claim could be reduced due to underinsurance. This means that if you need to replace the property, you’ll receive sufficient funds to do so.
However, it’s important to note that there are other types of inflationary protection available under some commercial policies, such as Day One uplift, which can operate independently of index linking. Your insurance provider or broker can explain this to you in more detail.
Want to know more?
At RiskBox, we aim to make insurance as straightforward as possible. So, if you have a question about index linking, are unsure if it’s been applied in your policy, or need advice on new or existing cover, get in touch today.
Our friendly team is on hand to answer all of your questions. You can reach us by calling 0161 533 0411, emailing firstname.lastname@example.org, or filling in our online contact form.
Agencies - September 25, 2023
Blog - September 11, 2023