Rising rebuild costs a potential headache for clients
Shauna Fogarty, High Net Worth Underwriter, DUAL Underwriting Ireland DAC
FIRST, the good news. The skyrocketing cost of construction materials is finally showing signs of slowing. The bad news? Prices remain incredibly high and will probably continue to rise in 2022, albeit at a gentler pace. As Simon Barry, Chief Economist at Ulster Bank said, “While still at a very elevated level consistent with ongoing rapid increases in input costs, the readings at the end of last year do suggest that the intensity of cost pressures and related supply chain challenges is now easing somewhat.” Materials’ prices rose rapidly at the end of 2021 as a knock-on effect of the winter COVID lockdowns.
Every type of manufacturing business has suffered. Operations that would normally stockpile weren’t able to. For example, sawmills across Europe are still playing catchup on timber production. This has seen the price of rough timber rise by 43%* The current gas price is also reportedly down to a similar inability to stockpile. The dramatic leap in wholesale prices is felt all across the construction industry.
You don’t realise how vital gas usage is to the economy until the price jumps, forcing the price of wholesale electricity to climb 260% over the last year. * Steel, plaster, cement, insulation… you name a construction material and the CSO has a figure illustrating an eye-watering price rise over the last 12 months. The situation has become so bad that a recent report by Trinity College Dublin economist and housing expert Ronan Lyons found that a builder’s break-even on a two bedroom flat is currently €450,000.
** The knock-on effect is felt in the cost of a new home: the Irish Homebuilders’ Association predicted at the end of last year that the average purchase price of a new home would jump between €12,000 and €15,000.
** Keep an eye on that one. I think it’s likely to prove true. The price of a new home closely correlates with the cost of other building projects. When it goes up, so do the costs of renovations on older properties or rebuilding from scratch in the event of a serious fire. Rebuild cost is one of the key rating factors in insurance pricing, the worst-case scenario the insurer must plan for. Over the last 24 months, rebuild costs have risen not only for the reasons above, but because of the latest energy efficiency requirements of new homes.
**** It is now not uncommon for the cost of a rebuild to be higher than a home’s market value, due to the requirements for the rebuild to be in line with the latest “Nearly Zero” energy efficiency standards that came into force in late 2020.
Last year it was widely reported that the SCSI Guide to House Rebuilding Costs for Insurance Purposes 2021 stated that the cost of a house rebuild had increased by 5-9%, depending on whereabouts in Ireland you live.
** The SCSI doesn’t release rebuild inflation figures every year, and we are not due an edition in 2022. So the dramatic inflation at the end of 2021 will not show up in the trusted SCSI figures until next year.
Inflation always moves at a different pace to official figures: prices rise in real time, transaction by transaction. Yet inflation can only be analysed and reported with hindsight. This time lag is why we use index linking as part of the underwriting process. Index linking adds a percentage onto a home insurance policy’s sum insured at each renewal.
This ensures that even if a home hasn’t been recently valued, or wholesale market movements have resulted in sudden rises in rebuild costs, the property is still adequately protected, rather than being underinsured in the event of a claim. Index linking is a vital safety measure that sometimes brokers and clients dispute the importance of.
But, in the event of sudden price rises, as we are experiencing at the moment, it does provide much more peace of mind without the need for an annual survey and valuation. It’s good to index-link annually, because the compound effects of missing it out for a few years can be devastating. In theory, a house would ideally undergo a valuation every time an insurance policy is taken out. In practice, this is not always feasible.
That’s why, as well as index linking, DUAL appraise all properties where the total sum insured exceeds €3m, to make sure the sums insured are adequate and the client is protected. Without these extra layers of protection in place, clients can potentially find themselves significantly underinsured due to inflation.
Working with an underwriter who specialises in home insurance for high value properties is a sensible route to getting the most comprehensive coverage, at the most competitive price. Shauna Fogarty is a High Net Worth Underwriter for DUAL Underwriting Ireland DAC. DUAL specialise, amongst other areas, in high net worth personal insurance in Ireland and are backed by Aviva. DUAL Underwriting Ireland DAC (trading as DUAL Private Client) is regulated by the Central Bank of Ireland. Registered No. 633531. Registered office: 98 St. Stephen’s Green, Dublin 2 D02 V324