How inflationary pressure impacts home insurance premiums

There are a combination of factors affecting home insurance premiums, and earlier this year we advised that premium increases of 10% to 25% would unfortunately become more frequent.

As we move towards the end of 2022, inflationary pressure is becoming an additional factor and here’s how it will affect home insurance premiums.

An insurer will set a premium based on a total sum insured and they will index-link the buildings and contents sums insured. This practice began in the UK in the 1970s during a period of high inflation as policyholders with large claims, particularly those involving the buildings, found that the amount paid to them in a claim was not enough to put them back in the financial position they were in before the claim. In order to counteract this, insurers increased sums insured by a percentage each year (index-linking).

Inflationary pressure is increasing the cost of contents and particularly buildings. As insurers index-link sums insured in order to keep up with these higher costs, there will be a corresponding proportional rise in premiums.

For example, one insurer’s index-linking figures for October are at 14% on the buildings and 12% on the contents. Unsurprisingly, their premiums are increasing by a similar amount. And whilst it may appear that insurers are profiting from this, they are not – their claims costs are also increasing.

Claims costs are increasing due to the delays caused by Covid, Brexit and the shortage of both labour and materials. So a three month repair may now take six months, causing a knock-on increase in claims administration and, more importantly, alternative accommodation. Plus, insurers were hit in 2021 by two major flood events, shortly after recovering from storms Ciara and Dennis in 2020.

In summary, premium increases of 10% to 20% will not be unusual in the coming months. We will continue to monitor the situation, review the market and ensure that premiums remain competitive. There are still deals to be made, discounts to be had and clever ways of reducing your premium – such as upgrading locks and security systems, choosing a higher excess, or talking to an insurer about jewellery or watch wearing habits. 

To talk to us about your home insurance, call 020 8256 4908 or email privateclients@howdeninsurance.co.uk