Ensuring you have the right cover for your property can sometimes be overwhelming, especially with all the insurance jargon that you must navigate. One such word that might cause you to scratch your head is ‘indexation’. In this article, we explain what indexation means for insurance and how it affects you.
In a nutshell, indexation refers to an increase in sums in proportion to the cost of living. Still confused? Don’t worry, we got you…
At EBM RentCover, we apply indexation to building insurance policies. So, the sum insured amount increases on renewal by a set percentage to help align it with inflation or changes to the Consumer Price Index (CPI).
For example, say the indexing rate is 10 per cent. If a policyholder’s building sum insured was previously $450,000, it increases to $495,000 upon renewal. The premium will reflect the new sum insured amount.
To help you out even more, below we answer common questions we get asked about this topic…
Why does EBM RentCover index building insurance policies?
We don’t want our clients to be under-insured. Therefore, we do what we can to support them to ensure they have accurate sums insured.
Say a policyholder took out cover five years ago and nominated a sum insured of $450,000. Due to increases in labour, materials and construction costs, it is unlikely that sum insured amount from five years ago would be enough cover today. By indexing the sum insured amount each year, it provides clients with a bit of peace of mind that they are better covered should the worse happen.
Ultimately, indexation helps maintain the adequacy of policy coverage as costs rise, ensuring that insurance limits remain up-to-date.
Is indexation a good or bad thing?
Indexation can sometimes be a concern for policyholders as it may lead to higher premiums.
However, the thing is, the rate of inflation, coupled with material and labor shortages, has seen the cost of construction significantly increase over the past three to four years. Indexation helps EBM RentCover policyholders to keep pace with these increases.
Does indexation change?
As inflation and economic conditions change, so too can indexation rates.
These rates typically vary based on shifts in economic conditions, inflation rates, and the insurer's policies and business structure. When indexation rates do change, your insurer will let you know during the renewal process.
What should I do when indexation changes?
Simply review your policy to understand how the indexation change affects the new sum insured, coverage levels, and premiums. This will help you determine whether the updated coverage still meets your needs. If you have any questions during the review process, it’s a good idea to contact your insurer directly. They can help you get your head around how it impacts you.
Are all insurance policies indexed?
No. Indexation depends on the type of policy and the insurer offering it. You should check your policy documentation to determine if it is indexed or not.
If my policy is indexed, do I have to accept the new rates?
That will depend on the policy and the insurer. As mentioned, at EBM RentCover, we index the building sum insured, however if you do not believe you need an increased sum insured, then you can let us know upon renewal. Ultimately, it is up to the policyholder to nominate the correct sum insured.
To summarise
Indexation can help prevent underinsurance and safeguard properties against inflationary pressures. Policyholders should review all policy details, including indexed sums insured, upon renewal to ensure the policy still meets the needs of the property they are protecting.
Got questions? Please get in touch with a member of our Expert Care team. We’re here to help – 1800 661 662.
*While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you need us we are here, contact 1800 661 662 if you have any questions.
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