Landlord insurance premiums driven up by inflation

After two decades of low property insurance premium rates, prices are being driven up by inflation. Steve Barnes, Associate Director at Hamilton Fraser Total Landlord Insurance, explains how inflation combined with other factors have created the perfect storm, and what this means for landlords.  

Historically, property insurance premium rates have been under-priced. This is because, although claims costs have been rising over the past couple of decades, insurance rates have not increased proportionately. This is now beginning to change as premiums are starting to rise to reflect the changing nature of risks, rising inflation and other economic factors, that property owners are exposed to today.

Inflation, the economy and the impact on insurance premiums

Inflation, which is measured by the Consumer Price Index (CPI) rose by 5.1 per cent in the 12 months to November 2021. This is the highest level in over a decade, according to figures released by the Office for National Statistics (ONS). And this figure shows a sharp upward trajectory in the latter half of 2021.

Coupled with rising inflation, the BCIS Materials Cost Index (BCI), which reveals the overall cost of materials, soared by 20.3 per cent in the 12 months to November 2021. Construction material costs in the UK are at their highest since the early 1980s, based on the annual growth of the index.

The combination of the rising cost of building materials and inflationary pressure on the economy in the aftermath of COVID-19, is being further exacerbated by labour shortages. While demand for new building works remains high in the UK, resources are hard to source and increasingly more expensive due to reduced supply. The shortage in skilled labour is triggering wage rises, with some builders reporting a rise in up to 25 per cent to attract the skills they need.

The result of all these factors combined is that rebuilding costs are spiralling. The cost of rebuilding a property after it has been damaged has risen dramatically because of escalating materials and labour costs.

Many economists and central banks are hoping the rising inflation we are currently seeing will soon ease. But even in the short term, as the market reacts to the steep increase in both inflation and the cost of materials, it’s vital that landlords make sure they are adequately insured. Buildings and contents insured will be automatically index linked at renewal, but it’s really important that they are adequate in the first place. At Hamilton Fraser Total Landlord Insurance, we would always make sure that your sums insured are maintained at adequate levels in this period of high building inflation.

In the long run, sustained higher inflation will result in higher payouts, and this will feed through into the pricing of premiums. To mitigate this, some insurers may reduce the amount of cover. So, it’s very important to check the small print and any exclusions, to make sure that you are still protected against the specific risks that affect buy to let, such as malicious damage, which unfortunately is on the rise.

What other factors are causing property insurance premiums to rise?

Rising inflation and market factors such as the costs of materials and labour are not the only things having an impact on insurance premiums. Insurers are seeing an increase in both the frequency and cost of claims across all types of cover, due to a number of additional factors. Most notable is the impact of climate change.

Climate change is leading to more frequent severe weather events across the UK, such as named storms and flooding. In 2020, the year that brought the pandemic, storms Dennis and Ciara alone resulted in an estimated cost of over £500 million to insurers. That year, we experienced a 95 per cent increase in storm claims compared to the previous year.

Insurers haven’t even factored in some of the worst surface flooding that we have ever experienced in 2021. The true cost will take time to come through, but this could easily match if not surpass the storms of 2020. This increase in severe weather is a key reason for the rise in premiums, as well as reductions in coverage such as flood exclusions.

Claims from plumbing leaks and frozen pipes have also increased in recent years, and these account for one in three of Hamilton Fraser’s claims. The damage caused by something like a burst pipe can be devastating – insurers in the UK pay out £1.8 million for this type of claim every single day.

Changing methods of construction and design are also a factor. Modern buildings are often less able to withstand fires, floods and storms and the trend for open-plan buildings has made it harder to contain fires once they take hold. The costs of settling personal injury claims has also risen, and in our increasingly litigious society, there is always the risk of false claims being made. If a tenant or a visitor has an accident that causes a life changing injury, the landlord could be liable for medical expenses and loss of income for the rest of the victim’s life, which can run into millions of pounds.

What can landlords and tenants do to minimise risks associated with rising insurance costs?

Landlords can’t do much to influence the level of inflation or the rise in extreme weather events. But fortunately, there are some steps you can take to minimise the impact of the rise in insurance premiums.

1. Carry out risk mitigation measures

Do all you can to make sure the property is safe, such as carrying out regular maintenance, signing up for flood alerts, making regular inspections and taking precautions when the property is unoccupied.

• Start your renewal process early

In the current climate, there are likely to be fewer quote options, so don’t leave it until the last minute to renew your insurance, or you may find your provider is no longer offering a policy which meets your needs.

• Make sure you’re not underinsured

Alarmingly, the average degree of underinsurance is 40 per cent. Underinsurance is a serious risk to property owners and can even result in an insurer turning a claim down. In the current market, insurers are more likely to refuse claims or pay out less than the amount being claimed for. It is therefore very important not to reduce your rebuild value, particularly with the increase in the costs of materials and labour. It’s a good idea to get a professional valuation so that insurers have confidence that they are charging the correct premium for the risk being covered.

• Provide detailed information and stick to the conditions of your policy

As interpretations are likely to become stricter, don’t give your insurer any reason to deny your claim. Provide as much detail about your property as possible, for example alarm and lock specifications. This will enable underwriters to apply discounts where they are able to, rather than assuming a worst case scenario. In the event of a claim, make sure you follow the claims process properly and contact your insurer immediately after an event to improve your claim chances.

• Check your standard excess

Consider increasing your excess as this will reduce your premiums without affecting your level of cover. This might be a sensible option if you rarely make claims.

The residential and commercial property markets have been steadily ‘hardening’ even before COVID-19 and the subsequent rise in inflation. Increases in premiums and excesses have been seen every quarter since the end of 2018, and this has been coupled with an increasingly risk averse approach and more stringent terms from insurers. You can read more about that in Hamilton Fraser’s article, Six risks in a hardening insurance market and how to avoid them. The key thing for landlords to understand is that it is crucial to check your insurance cover properly to make sure you’re fully protected and not to be tempted to reduce coverage. This is not the time to cut corners when it comes to cover if you want to avoid the pitfalls of property underinsurance.

If you have questions about the rise in insurance premiums, or would like to discuss landlord insurance with one of our experts, feel free to contact the Hamilton Fraser Total Landlord Insurance team. 

Call Total Landlord Insurance today on 0800 63 43 880 quoting code LZ2022 or get a quote online in under 4 minutes.

You can also visit our Knowledge Centre, where you will find a library of content packed with useful advice for landlords to help you minimise your risks and make a success of your business.

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