How common is underinsurance?
Nine out of ten properties in the UK are insured for the wrong amount.
The risk of underinsurance increases when the economy is under pressure. And when costs have gone up across the board, the underinsurance gap between property rebuild costs and the amount buildings are insured for in the UK widens.
According to Rebuild Cost Assessment, 76% of UK buildings remain underinsured - an improvement from 81% in 2023 and the peak of 83% in 2022. However, despite the downward trend, underinsured properties are, on average, still only covered for 63% of their true rebuild cost.
Johnny Thomson, RebuildCostASSESSMENT.com’s Marketing and Communications Director says:
“Regardless of the in-roads we’re making, I believe everyone would agree that underinsurance remains unacceptably high. The way I see it, on every high street where there’s a mix of commercial and residential properties, or on every industrial estate in Britain, between seven and eight of every ten properties you’ll see there will be underinsured. Around two will be overinsured and only one is likely to be covered for the right amount.”
Johnny continues:
“Valuations are helping a lot, but there’s also a lot more work for us and the insurance industry to do to tackle this problem. Property owners expect claims payments to meet expectations and it is far from a good outcome when this doesn’t happen. There’s an emotional as well financial cost in every case, and this is something we hope to eradicate.”
The impact of inflation
What is concerning now, say Rebuild Cost Assessment, is how underinsurance figures have been impacted by inflation since their peak in 2022. “Our latest analysis suggests that aligning sums insured on buildings with real-world rebuilding costs since the beginning of 2022 would have required an increase of 68% to 82% over the past three years. That’s not a marginal adjustment, it’s a fundamental recalibration of the risk landscape.”
Since January 2022, construction and materials costs in the UK have surged by 25% to 35%. For buildings that were already underinsured in 2022, this inflation has only widened the gap, leaving many properties even further underinsured from their true rebuild value. Without proactive updates, the risk of significant underinsurance across the industry continues to grow.
When inflation is applied to 2022 data, according to Rebuild Cost Assessment:
Properties insured at just 68% of their correct rebuild cost now need increases of around 85% to 98% to be fully covered
Even overinsured properties (at 126% in 2022) have seen their margins shrink, though the required reductions are far smaller
Across the board, the weighted average adjustment needed is between 68% and 82%
These are truly staggering statistics that point to a UK wide problem which can only be resolved by landlords realising the risk they’re running and making sure their buildings are insured for the right amount. The alternative is a serious risk of claim shortfalls if sums insured are not aligned with accurate rebuild costs based on today’s cost realities.
We’ve already mentioned that the underinsurance gap widens when the economy is under pressure, and in the current climate we’ve all noticed that the cost of everything – from food to fuel – has gone up. And insurance is no exception. Some of this is down to inflation, but this is not the only reason.
‘Index linking’ is a way of making sure that the value of a financial product is protected against rises in costs in the wider economy. A facility is put in place to track rises in costs – such as inflation and the cost of living – and then a similar percentage increase is applied to the value of the product.
In the case of buildings insurance, index linking typically relates to the rebuild costs of a property, which includes the labour and professional services that are required to rebuild the property, on top of inflation.
Due to a number of factors, index linking increased rapidly at the beginning of 2022, when it was around four to five per cent peaking at 18.2% by October 2022. This affected landlords because landlord insurance covers the cost of rebuilding the property if it is damaged beyond repair.
Since then, index linking has decreased as house rebuilding cost inflation has calmed, but prices have not returned to the level they were at before 2022. The house rebuilding cost index was 40% higher in January 2024 than it was in January 2020.
Steve Barnes, Head of Broking at Total Landlord, says:
“Over a rolling 12 months, index linking has settled to around five per cent, which is a significant drop from the circular post-Covid increases, which peaked at nearly 20%. While this is a welcome easing, it doesn’t mean property owners can afford to be complacent. Rebuild costs remain substantially higher than pre-2022 levels, and it’s still essential to check that your property is adequately insured each year. I recommend having a professional valuation carried out at least once every five years to make sure your cover remains accurate and up to date.”
In terms of the future outlook, BCIS construction industry forecast predicts that building costs will increase by 17% over the next five years. Dr David Crosthwaite, Chief Economist at BCIS, said:
“Sentiment in construction has changed significantly since the start of the year and, with economic growth stagnating and inflation starting to pick up again, stagflation is becoming a real possibility this year.
‘As a result, we’re forecasting that 2025 will likely be another difficult year for construction with only minimal output growth evident before growth accelerates later in the forecast period.
‘While the cost of borrowing is reducing, albeit slowly, we have yet to see increased levels of investment in built assets. Furthermore, we expect to see increases in both input costs and tender prices due to the National Insurance uplift, resulting in potential affordability issues.”
While there are some signs that the situation may improve over the next five years, this is unlikely in the short term.
Prices have not returned to pre-2022 levels, with the cost of many raw materials remaining high. Ongoing shortages in skilled labour are continuing to drive up labour costs, and high energy prices continue to add pressure. The situation remains uncertain for the foreseeable future.
Rising rebuild costs due to inflation and labour shortages
Index linking has slowed but prices remain high
Economic uncertainty and stagnating growth
Lack of regular property valuations
