At a glance
- The cost and availability of building materials are among the factors to consider when setting the correct sum insured on a home insurance policy
- Building materials costs have risen significantly in recent years, highlighting the need for professional valuations in order to avoid underinsurance
- We look at what this means for high net worth clients
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Perhaps one of the most enduring misconceptions about home insurance, is that the sum insured on a policy equates to the building’s market value.
In fact, the sum insured reflects the cost of reinstating the building from scratch. Fluctuations in the cost of building materials are therefore a crucial consideration when setting the correct sum insured, in order to avoid underinsurance.
This is particularly true of buildings that require rare or specialist materials, as is often the case in larger, older properties owned by high net worth (HNW) clients.
How the cost of construction materials has increased
Building materials costs have been rising steadily in recent years. Data from the Department for Business, Energy and Industrial Strategy shows the cost of materials for new housing, repairs and maintenance has grown by more than 20% since 2010.
This echoes the findings of a survey of members of the Federation of Master Builders (FMB), which revealed significant year-on-year increases in the costs of a wide range of common building materials, including bricks (9%), timber (8%), slate (8%) and insulation material (16%).
Around half of the builders surveyed (49%) said they had been forced to pass on the cost increases to their clients.
Heritage properties pose complex challenges
For HNW clients, reinstatement projects often involve larger, older properties, including listed buildings with complex requirements about the types of material that can be used.
Not only are some of these materials – such as stone, hardwood and handmade bricks – increasing in cost, they can also be extremely difficult to source.
Why are building materials getting more expensive?
One reason is the relative weakness of the pound against the euro since the EU referendum in 2016, which has made it more expensive to import goods from the EU.
Brian Berry, chief executive of the FMB, says Brexit uncertainty has been a factor, but adds: “High demand due to buoyant international markets could also be contributing to price increases.”
While the new majority Conservative government is pushing ahead with its revised Brexit Bill, there is still just under a year to go before the end of the transition period for Britain’s exit from the EU.
As a result, there remains considerable uncertainty about what kind of trade deal Britain could end up with (if any) and how this could affect the cost of importing building materials.
Shortage of skilled construction labour adds to challenge
How Brexit will work in practice could also affect the future availability of skilled construction workers from Europe – with the knock-on effect of influencing the cost of reinstating a property.
According to Brian Berry: “The construction skills crisis means that key trades are extremely difficult to recruit. If the sector isn’t able to draw upon crucial EU workers of all skill levels, who have so far served to mitigate this shortage, the slowdown of growth will continue.”
Any shortage of labour could present particular challenges for more complex reinstatement projects, such as heritage buildings, as specialist restoration experts are already in short supply.
How can brokers help HNW clients avoid underinsurance?
Brokers have a crucial role to play in ensuring fluctuations in building materials costs are factored in when clients select a property sum insured.
Brokers can also explain the benefits of conducting professional valuations periodically to further reduce the risk of underinsurance.
To find out more, speak to your usual Zurich contact.