Climate risks highlight need for reliable rebuild cost data in insurance decisions

Brokers and insurers should help policyholders understand the importance of keeping sums insured in line with rebuild costs as climate-related property risks increase, BCIS has cautioned.

A new report⁽¹⁾ warning that increasing climate risks could make property insurance less affordable or harder to obtain in some communities and sectors has reinforced the importance of reliable, up-to-date rebuild cost data.

Robust rebuild cost estimates cannot resolve challenges around insurance availability but they play an important role in helping property owners maintain adequate levels of cover where insurance remains accessible.

The report, published by Inside Track x (Re) Insurance, brings together the views of senior professionals from across the UK and European insurance and reinsurance industries.

It states that increasing physical climate risks could prompt insurers to raise premiums, restrict cover or withdraw from higher-risk areas, including flood-prone communities. This could leave more property owners exposed to uninsured losses.

Cos Kamasho, principal consultant at BCIS, said the growing pressure on insurance availability makes it increasingly important to ensure that properties which can be insured have appropriate levels of cover.

‘Climate change puts pressure on both access to insurance and the adequacy of cover,’ he said. ‘Even where insurance remains available, an outdated estimate or one that does not reflect the property can leave a policyholder facing a substantial shortfall.

‘Insurers and brokers should help policyholders understand the full cost of rebuilding, including demolition, debris removal and professional fees. Rebuild cost estimates need regular review to reflect construction cost movements and reassessment when a property is extended or improved.’

Kamasho added that the potential impact of resilience improvements on rebuild costs should not be overlooked as property owners look to reduce their exposure to climate-related damage. Flood-resistant materials and specialist installations, for example, may reduce future damage but can cost more to replace than standard alternatives.

‘Insurance cover should account for these costs, which may require policyholders to discuss any resilience improvements they have made, or plan to make, with their insurer or broker,’ he said.

Ensuring additional costs are reflected in sums insured is important, as the consequences of underinsurance can extend beyond a total loss, particularly where an insurance policy includes an average clause.

‘Where an average clause applies, underinsurance can also affect payments for partial claims, potentially leaving policyholders to meet a significant proportion of the repair costs themselves,’ he said. ‘This could delay repairs and the building being fit for use.

‘The impact of widespread damage across a local area or region can further complicate recovery. Increased demand for local labour and materials can drive up repair costs, creating additional pressures that insurers must consider alongside the changing nature and frequency of climate-related risks.

‘The bottom line is that better property information and current rebuild cost data should increasingly underpin insurance decisions. Equally, insurers and brokers must make cover limits, exclusions and policyholder responsibilities clear.’

The report arrived after the UK government confirmed plans to pilot flood performance certificates. These are intended to help property owners better understand their individual flood risk and identify resilience measures that could reduce potential damage.

Kamasho explained that the proposed programme could help improve the accessibility of financial products for dwellings with high-risk profiles. If certificates provide evidence that resilience measures have reduced a property’s flood risk, insurers may be better placed to reflect this in premiums, excesses and cover terms.

An estimated 6.3 million properties in England are located in areas at risk of flooding. The Environment Agency estimates that flooding to properties from rivers, the sea and surface water costs the economy £2.3 billion in a given year⁽²⁾.

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^{(1) Inside Track x (Re)Insurance – Sounding the Alarm – here}

^{(2) GOV.UK – Estimating potential economic costs of flooding – here}