Pressures on construction industry fuel risk of underinsured property

Financial Conduct Authority (FCA) data show that while the volume of complaints about property insurance has held steady in recent years, the cost of settling them is climbing. Against a backdrop of growing scrutiny over the fairness of claims decisions, Richard MacLean, executive director at the Building Cost Information Service (BCIS), explores how rising reinstatement costs could be reshaping the home insurance market.

Pressures on construction industry fuel risk of underinsured property

More than 93,000 property insurance complaints were opened in the first half of 2025 across the UK, with firms setting aside over £43.6 million to cover potential redress payments, according to data published by the FCA. Complaint volumes have remained broadly stable; the number recorded in H1 2025 was just 3% higher than in H1 2021. By contrast, provisions made by firms to settle complaints rose by 21% over the same period, lifting the average provision per complaint opened from just under £400 to almost £470.

Elsewhere in the FCA’s data, buildings insurance showed a 63.2% claims acceptance rate in 2024, up slightly from 63.0% in the previous year. Combined buildings and contents policies had a higher rate at 71.9%, but both remain well below most other insurance products, where acceptance rates exceed 90%. That disparity prompted Which? to file a super-complaint with the regulator, challenging what it sees as unfair claim definitions and practices across the home insurance market.

In response, the FCA said it would expand its existing programme of work on home insurance, focusing on improving claims handling standards and consumer understanding of policy cover, while stepping up supervisory and enforcement action where it identifies poor practice.

Why might there be disparity in this area of insurance?

Unlike most other types of insurance, property claims are shaped by far greater variability. Motor insurance, for example, relies on standardised datasets – age, mileage, make, model and condition – making valuation comparatively consistent. A 20-year-old vehicle in Glasgow is fundamentally the same product as the one in Gloucester. Homes, by contrast, differ dramatically in size, construction form, condition, maintenance history, extensions, and exposure to localised risks such as flooding or emergency response times. Even before reinstatement is considered in detail, two superficially similar properties can carry entirely different risk profiles and cost bases. This inherent complexity helps explain why acceptance rates for home insurance have historically been lower than for other categories, and why rising construction costs amplify pressures on both claim outcomes and insurer provisioning.

While regulatory concerns focus on fairness and transparency in claims handling, an equally important question is why settling a home insurance claim has become more expensive in the first place. The answer to that lies largely outside the insurance sector. Reinstatement costs are being pushed up by deep-rooted pressures within construction, some of which have intensified since 2021. These pressures also increase the likelihood of properties drifting into underinsurance. As costs rise and diverge regionally and by construction type, sums insured set even a few years ago may no longer reflect the true reinstatement value of a home.

Together, these pressures are reshaping the true cost of repairing or rebuilding damaged homes and, in turn, influencing the provisions insurers must make when disputes arise.

7 construction forces pushing reinstatement costs higher

1) Labour market pressures

Widespread shortages reported in key trades, competition for specialist skills and limited workforce capacity are all pushing labour rates higher. Construction is a labour-intensive sector and costs are driven not only by wage levels but by the amount of time workers must spend on site. Data published by the ONS suggest the construction workforce has shrunk to its lowest level in almost 25 years. When fewer people are available, reinstatement takes longer, requires more expensive subcontractors and carries greater programme risk. All of this feeds directly into higher rebuild costs, meaning sums insured can fall out of date faster than many policyholders realise.

2) Elevated materials costs

While materials cost inflation has cooled from its peak – the BCIS Materials Cost Index rose by more than 25% in the year to June 2022 but by less than 3% in the year to November 2025 – overall prices remain significantly higher than in 2021. Construction materials behave differently to consumer goods. They are bought in bulk, often via multi-tiered supply chains, and are highly sensitive to energy prices, global commodity markets and manufacturing capacity. Even modest year-on-year increases compound into substantially higher rebuild values, particularly where sums insured have not been reviewed recently.

3) Demand pressures from retrofit and energy-efficiency work

National retrofit programmes and local energy-efficiency schemes can absorb specialist labour and key materials, such as insulation products and glazing systems. These programmes often operate on fixed delivery cycles, meaning contractors prioritise them because they offer predictable workloads. When there is competition for resources in this way, prices can rise and capacity be diverted away from repair and reinstatement work. For insurers, reinstatement quotations can therefore be higher and later than expected, widening underinsurance gaps.

4) Regulatory and compliance uplift

Reinstatement is no longer a simple like-for-like exercise. Requirements introduced under the Building Safety Act, alongside heightened expectations for fire resistance, insulation performance, airtightness and working standards, mean replacement work frequently exceeds the technical standard of the original construction. This requires additional design input, certification, specialist inspections and sometimes different construction methods. Where sums insured were set under previous building standards, they may no longer cover the reinstatement requirements needed today, also increasing the risk of underinsurance.

5) Growth of specialist and proprietary building systems

Newer homes increasingly feature proprietary panel systems, engineered timber solutions, ventilated cladding systems and high-performance membranes. These systems often rely on components from a single manufacturer and must be installed or repaired by approved specialists. Unlike in traditional brick or block construction, materials cannot always be substituted and labour cannot always be sourced locally. Replacement parts may be imported, produced in batches or subject to longer lead times, and installation requires accredited contractors – all of which push costs higher. Generic rebuild calculators could struggle to capture these nuances, making accurate reinstatement values difficult without construction-specific data.

6) Rising preliminaries, plant and professional fees

Beyond the direct costs of labour and material resources, reinstatement projects carry a range of ‘preliminaries’, the essential behind-the-scenes costs needed to organise and manage the work. Even for smaller residential or commercial reinstatement jobs, contractors may need to provide, for example, site supervision, protection of existing areas, temporary services, access and scaffolding, health and safety measures, and coordination of multiple trades. The site’s location, as well as other factors, can impact greatly on the plant required and its associated cost. As programmes become more complex and standards tighten, these operational costs rise. Professional fees have also increased, with architects, engineers, surveyors, fire consultants and other specialists often required to design, certify and oversee compliant reinstatement work.

7) Climate-related severity and complexity of damage

Wetter winters, more localised storm activity and increased flooding are creating more complex reinstatement scenarios. Even relatively small flood or water-ingress events can require strip-out, drying, decontamination, specialist remediation and staged reconstruction. This adds time, labour and technical assessment, all of which increase reinstatement costs. As these events grow more severe and become more frequent, sums insured need to reflect the increasingly complex nature of modern reinstatement.

What does this mean for insurers?

The combined effect of these pressures is clear: claims are becoming more expensive to settle, not because insurers are less willing to pay them, but because the true cost of reinstatement has moved ahead of what many policyholders understand or have insured for. This widening gap is likely to leave more properties underinsured unless rebuild values are kept up to date using robust, construction-specific cost data.

For insurers, the rising provisions seen in the FCA’s figures represent the downstream effect of structural shifts in construction. As many in the construction industry are realising too, this is our ‘new normal’, not a short-term anomaly, and insurers will need to adjust sums insured, pricing and claims decisions accordingly.

To keep up to date with the latest industry news and insights from BCIS, register for our newsletter here.