The indexation notice in the renewal letter triggers a reflexive irritation in many people: “here we go again, it's getting more expensive.” Yet indexation is primarily not about the premium at all, but about the sum insured: it adjusts the figure to building costs and prices, so that the policy is still worth as much at claim time as it was at inception.
- Indexation is value tracking: at renewal it adjusts the sum insured to changes in costs – and the premium moves proportionally along with it.
- If you decline indexation for years, your home can quietly become underinsured – which can lead to proportional settlement at claim time.
- The rate of indexation isn't gospel: if it seems to be drifting away from the reality of your house, it's fine – and worthwhile – to raise the question at renewal.
How does it work in practice?
Before renewal, the insurer sends a notice setting out the proposed new sum insured and the premium that goes with it. Insurers typically tie the increase to movements in construction and consumer prices – sometimes with a different index for the building and for contents. At this point you have a choice: accept the value tracking, or, following the terms, indicate that you see it differently.
Staying silent typically means acceptance – and that's a sensible default: the policy then tracks prices on its own, and you have nothing to do about it during the year. If you'd rather decide, you can do so in the way and within the deadline set out in the notice – which is why it's worth not putting the renewal letter down unread.
Why isn't this a premium increase for its own sake?
Because the sum insured and the premium move together: the insurer takes on liability for a larger value, and the premium is proportional to that. Recent years have shown how quickly material and labour costs can move – a figure that was accurate a few years ago may now be too low for the same house. Indexation closes that gap year by year, in small steps, so you don't have to face one large jump.
Put another way: indexation isn't the insurer's appetite at work, it's the upkeep of your rebuilding value.
What happens if you decline it for years?
In the first year, almost nothing happens – and that's exactly the trap. The gap between the sum insured and reality widens only a little each year, but over five to ten years it can become a real difference: the house looks fine on paper, but is actually only partly covered. This is when proportional settlement can kick in: the insurer may settle the claim in the same proportion as the sum insured bears to the real value.
If you want to keep the premium under control, declining indexation is not the right tool – adjusting the other factors behind the premium instead is: the deductible, the scope of cover, the payment method – along with putting the market to competition. That way the premium and the protection stay in balance, without cutting into the sum insured.
When should you question the rate?
The index tracks a typical, average change in costs – but your house isn't average. If you've had a major renovation or extension, the index alone may not be enough; if the sum insured was already set too high, a mechanical increase just keeps pushing it further up unnecessarily. That's why it's worth spending a quarter of an hour at renewal on an annual review: is the sum insured right, and does it need correcting – upward or downward?
Your broker can help here too: if you ask for a review, I check whether the value and the sum insured are drifting apart – the decision is yours.
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