The Impact of Rising Building Costs on Insurance

We cannot escape the talk in the media about rising building costs. Even buying a tin of paint for a DIY job at home has become staggeringly more expensive over the last few years.

Part of our brief at BCH is to ensure that rising costs are reflected in our building reinstatement cost assessments for insurance purposes (RCAs for short). It is important that the value stated by the policyholder at the start of the policy is accurate and up to date. If not, then at the time of claim, the impact could be severe, as the claim could be reduced in proportion to the amount the true value bears to the value declared in the policy (known as pro rata settlement or Average).

Why has inflation taken off now?

Thinking back before the pandemic, there was talk of the impacts of Brexit being felt in the construction industry. BCIS (Building Cost Information Service part of RICS) gave three scenarios, the best, worst and most likely impact on construction activity and cost inflation. The cost drivers were predicted to be, losses of labour and potential delays in obtaining materials from the EU Bloc. When Brexit eventually happened, predictions became reality as the construction industry lost a substantial number of its overseas workers and had restrictions on imports from the EU.

Then in early 2020, the pandemic struck. Inevitably, construction activity took a sharp decline but rose relatively quickly throughout the summer of 2021. Early restrictions were, of course, imposed, and many construction sites had to significantly change working practices to ensure worker safety.

By March 2021, monthly output exceeded pre-pandemic levels – compounding issues that had been building throughout 2020. When demand exceeds supply, prices for labour and materials go up and lead times are delayed. Unusually and unlike previous construction cycles, the drivers of increased costs, were acute not only in the UK, but worldwide. The impact was massive, from the price of timber and carpenters, to plaster and plasterers and so on.

2021 saw a few more acute factors adding to the pressure on inflation including fuel costs, a shortage of HGV drivers and the ongoing effects of the pandemic. Contractors in fixed priced contracts were left to ‘absorb’ increased costs. History shows that this will lead to contractual disputes and delays in completions. There is also evidence of larger companies stockpiling materials. Speculating in this way was a sound move, but the result was a reduction in supply and rationing/shortages of supply for the wider market, particularly smaller sized contractors.

Combining this with the reduction in manufacturing capacity both here in the UK and overseas and the ability to transport materials, a substantial rise in cost was the outcome, as demand outstripped supply.

This chart shows the cost of labour and materials, alongside the BCIS House Rebuilding Cost Index and General Building Cost Index from June 2020, onwards.

Happy New Year-2022!

So, 2022 arrived and we ‘welcomed’ a new style of lockdown. True, buildings carried on getting built, but severe supply issues for labour and all components, raw materials including fuel, remained with us. We have reached a pinch point. Key indicators are that tender prices are rising at a speed not seen for many years.

Mark Fowler, Director of MDA Consulting, one of BCH quantity surveying partners, summed the situation up recently:

“In terms of how building costs and tender prices increased during 2021, it was interesting to see that a lot of data / commentators (including ourselves) were – at the beginning of 2021 – forecasting increases for the year in the region of 1% to 2.5%.

In reality, those same commentators have reported actual increases of anywhere between 4% and 6.5% (and the BCIS have reported 6.7%), so there has clearly been a far greater impact on both building costs and tender prices than most people were envisaging.”

Cost increases and shortages of certain materials have been widely publicised, and there is plenty of evidence that certain timber and steel components too have risen in excess of 50-70% through 2021.

But we must remember, when putting together a rebuilding cost value for insurance purposes, that different building construction methods could mean that one type of property has been more severely affected by inflationary factors, than another. This is addressed by a detailed RCA or Benchmark but is commonly overlooked by generalised indexation. A bespoke assessment recognises the fact that few buildings are ‘average’ and thus, basing assessments that value on average building costs, could leave a policyholder significantly underinsured, or in some cases overinsured.


Looking Forward

If 2021 was a surprise to most, how can we confidently comment on what’s to come?

At the time of writing, the headline inflation rate was announced at 5.4% which is the highest for 30 years. Predicted to go to 6-7% before levelling off in the summer. BCIS, currently reporting a 40 year high on materials costs, are commenting that it is likely that the pressure on material prices and availability will continue throughout 2022 but, that the major driving impact this year is likely to be further labour shortages.

Mark Fowler, further stated:

“It is interesting to see that the BCIS are currently forecasting increases for 2022 of between 1.5% and 3.5% – however, combined with the well-documented issues relating to Brexit, Covid, increases in transport and logistics costs, and ongoing uncertainty about energy/fuel tariffs, it is difficult to forecast with certainty what this might mean for tender prices during 2022.”

What is clear, is demand is exceeding supply, across many areas. The result is price increases. In time, if prices go up too much, demand will reduce as people push back projects. BUT, with insurance claims you don’t have the ability to delay decisions on the project, the project be it repair or rebuild must proceed quickly, to help businesses and families return to normality and the market rate at the time of loss, however high, has to be paid.

The Impact on Insurance and the Insured

In one of our most recent articles, BCH Director Martyn Barrett talked about the ‘hard market’ in insurance and what it meant for all stakeholders in the insurance process. Premiums are rising and a tougher stance is being taken on underinsurance in claims settlements. There is never a good time to be underinsured, but the climate is tougher now than ever. A significant rise in inflationary pressure on claims costs will only lead to even to more scrutiny of the claim and as part of that process the validity of the base sum insured set at policy inception.

It may well be short-lived but a policyholder could be caught out should major loss occur in a period of cost inflation. The Sum Insured could be completely exhausted even with an inflationary uplift built into the policy provision. Standard inflationary uplifts may not be enough, particularly if there is a complex building with a long reinstatement period. In short, the base figure must be right from inception.

As the experts in insurance rebuilding costs and how they relate to policy cover, BCH are left wondering how property owners can afford not to protect themselves properly, looking at both declared values and inflation provisions within policies.

Nobody wants a claim and none of us can predict, if or when, that might occur. But if the unpredictable happens, the last thing you want to discover is underinsurance. At that time, it is too late to correct. If there was ever a time to undertake an RCA or Benchmark, it is now. Furthermore, even if you’ve undertaken one recently, at the annual policy review you should consider what might have happened to costs for your type of property since the last RCA with your insurance professional.

More than ever, the approach to insurance valuation needs to be dynamic and the answer may well be more regular reviews until a degree of normality returns, which at the time of writing is predicted by many commentators…but for now we can look at all these predictions and make a judgement. We haven’t quite resorted to using a crystal ball!

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Risky business: don’t risk underinsurance in a tough market

Mark Briggs discusses Benchmark, the cost effective e-valuation service from insurance valuation specialists BCH that ensures your buildings insurance cover is set at the right level.

Damage to property is a fact of life. During the pandemic, fires, floods and water damage may not have made the headlines while we have all had other, more pressing problems to deal with, but they have still cost businesses thousands of pounds to put right. These emergencies are still the most common cause of major loss – and they haven’t gone away just because our thoughts have been elsewhere.

The other issue that has not gone away is that, despite the best efforts of brokers to highlight the problem, well over 80% of all property we see is still underinsured. So now, more than ever, it is important for anyone responsible for securing buildings insurance to make sure their policies are regularly reviewed to ensure cover is adequate. Not many of us are in a position to fund any shortfalls in insurance pay outs that could result from underinsurance.

Here at BCH, the launch of our Benchmark E-valuation service in early 2020 was an immediate solution to the fast changing situation brought by the pandemic last year by offering our customers desk-based advice on property insurance values when we were unable to carry out in-person valuations.

Before the pandemic, we had been working for some time on an e-valuation service. Our soft launch during 2020 and the positive response from customers has driven our decision to extend this service more formally in 2021. Branded as Benchmark, the BCH e-valuation service aims to meet demand in the market for a more cost effective, quick-yet-still-accurate service to verify building insurance values, without the need for a site visit.

“Being able to offer the BCH service to clients is a great benefit to both our customers and us. When quoting for a nurseries’ insurance we are often able to comment on whether we think their sum insured is too low based on our knowledge of the sector and other comparable nursery settings. With buildings, it’s different and needs an expert. We are delighted to be able to recommend the services of BCH to our clients.”

Melanie Smith, Marketing Manager, Stanmore Insurance Brokers

Our service has proved instantly popular with all parties to the insurance contract; insurers, brokers and intermediaries and, of course, property-owners. Benchmark will never replace a fully RICS compliant, site-based reinstatement cost assessment (RCA). But, for smaller, simpler commercial risks and blocks of flats up to £5m and for residential houses up to £2million, it is an alternative which should help customers ensure their property insurance values are set at acceptable levels.

The launch of Benchmark has coincided with a tougher stance being taken by insurers on underinsurance, which is generally only discovered when a claim is made. Loss adjusters and brokers have reported that cases of application of Average (which means claims are reduced related to the level of underinsurance), are increasing. At BCH we are now being instructed by insurers to check the adequacy of insurance values after losses to assist them in considering reducing claims pay-outs. We are also asked by policyholders to challenge the values being used by insurers to reduce claims after loss. Sadly, this is often a desperate attempt to reduce the impact of underinsurance and rarely helps.

Policyholders continually need reminding pre-renewal that the responsibility for setting insurance values ultimately rests with them. Should the values submitted to their insurer be found to be lacking at the time of claim, there are consequences. These are laid out in their insurance contracts and the value of their claim is likely to be affected. What will follow is at best disappointment and, in the worst case scenario, leaseholders and business owners could be looking at financial ruin.

“Not only does our comprehensive Benchmark service utilise the Building Cost Information Service (BCIS) and our database of over 50,000 site-based surveys, we are also introducing a new data source – SPONs, it provides the most accurate, detailed and professionally relevant construction price information for the UK. All our Benchmarks are carried out by surveyors who continue to complete site-based Reinstatement Cost Assessments.

Our desk-based e-valuation is quicker from instruction to report; considering this and the limit on liability, Benchmark’s fee is lower than a traditional, fully compliant site-based RCA but not suitable for all buildings.

With the substantial uptake and growth since our soft release in early 2020 we are setting ourselves up for an exciting 2022.”

Lee Bond, Benchmark Principal Surveyor

Even for Insurers, times are hard and the current market conditions and prospects, are about as tough as they get. The attitude to underinsurance at the time of claim is getting tougher. Adequate insurance levels should ensure that policyholders making claims don’t end up victims twice….suffering a loss and then having their pay-out reduced.

You can call us on 01455 293510, email or order a benchmark directly on our website.

If you are a broker, insurer or managing agent, you may benefit from our Portal which through a log-in, enables you to request, manage and track the status of multiple RCAs and Benchmarks for your customers – ask us for more information!

The valuation of buildings within prime Central London

Reconstruction costs in prime central London locations.

Reconstruction costs within Prime Central London far exceeds any published data.

As valuers of property all over the United Kingdom, our experience in the last 12 – 24 months is that reconstruction costs within Prime Central London, as defined by the postcodes below, far exceeds any published data.

This paper is intended to alert underwriters, brokers, managing agents and property owners to possible underinsurance that will be sitting within these locations.

The current position

The increase in market values in PCL is widely acknowledged with comments being used such as ‘the market’s gone crazy’, ‘prices are rocketing etc.’. There has been a lot of comment in the press with regard to the purchase of property within PCL being seen as a safe haven for foreign investors during the last few years. All brokers/ underwriters will recognise owners of property and homes in these locations fitting that profile.

Knight Frank has been tracking this since 1976 and although the trend in 2013 has been slower than some previous years, growth over the last 3 years has far outstripped that in other parts of the country.

Although it still remains the case that there is no correlation between market value and rebuild costs/the building sum insured, it stands to reason that a contractor working in a home that has just cost £15,000,000 to purchase – or indeed £1,000,000 – is not going to charge £50 to fix a dripping tap.

The cost of employing reputable contractors in these locations has increased. The market values have increased far beyond any indexing applied to an insurance policy and, while again we would not want to make any firm correlation between market and insurance value, one does need to dig a bit deeper as to what is going on on the ground.

The profile of the client has to be considered. The process required to create a perfect and flawless finish and the expected ‘scope creep’ of a design scheme, does take longer to achieve and inevitably contractors price this into their fees.

Scope creep and technology in buildings.

The technology found in such buildings is also increasing. It is not uncommon for a quarter of the sum insured to be taken up by lighting, heating, air conditioning, audio/visual installations etc. It is worth noting that in a standard office building, the inclusion of full air-conditioning (a must have in some quarters now) can add 20% to the rebuild cost.

We have assessed flats where clients have paid £8,000 per m² of floor area just for the internal fit out. There are also cases where a simple refurbishment of a PCL townhouse in a very sedate – one may even say ‘ordinary’ HNW scheme – has cost £7,000 per m². Internal fit outs of some commercial spaces – again with a fairly calm, simple scheme – have come in at £11,000 per m².

One BCH client reports spending £5,000,000 on a reception hall/ lobby scheme. Anecdotally there seems to be an element of “keeping up with the Joneses” with clients wanting to outspend their competitors or neighbours.

Carrying out a rebuild in a very tight/compact location and managing a project around restricted working practices and hours enforced by local authorities and planning bodies, also have a severe impact on the amount charged and the length projects take to complete. While some of the above may seem not to be relevant to insurance, there is an assumption that insurers have deep pockets and that claims are simply ‘expensive’ and the cost of the unexpected seems to have become the norm.

Re-valuation of buildings – the most prudent response.

Attention is drawn to the need to re-assess the base sum insured on a regular basis. Good practice advises that this is dealt with by way of a desktop update on an annual basis, with a full re-assessment undertaken in every third year. A full assessment also needs to be prepared in the event of substantial alterations being undertaken to the property.

Royal Institute of Chartered Surveyors
The above is the official guidance given on this matter by the RICS. However, very very few organisations carry out an annual review or even a three year review. Most owners and organisations leave it for at least five years. It is our opinion that for properties in PCL, the desktop update for those assessed during 2012 and those assessed on the basis of a site visit during 2010 or before should now be marked as an URGENT PRIORITY.

To conclude

Taking all this into consideration, BCH has revisited its view on costs within the PCL postcodes and is now adding significant contingency to reflect the increased costs compared to other parts of the UK. We would urge that desktop updates or full revisits be requested (depending on the date of the original assessment) to take into account what we see as a key market shift. This is essential to protect not only policyholders but also insurers; especially those offering any type of guaranteed rebuild cost where effectively the sum insured is unlimited.

Prime Central London postcodes include:

W1, W8, NW1, NW8, SW1, SW3, SW5 and SW7.

Also parts of WC1, EC1, EC2, EC3, EC4, E1, SE1, NW5, N1, SW6, W11, W14 and W6.

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