The anniversary letter contains the line: the insurer proposes indexation, and the sums insured and premium will rise by this much. Many companies reject it out of reflex – yet indexation isn’t a premium-hiking trick, it’s maintaining the sums insured. Let’s look at what it can do, and what it can’t.
- Indexation adjusts the sums insured to price changes – tracking the rise in construction and purchasing costs.
- A company that rejects it year after year can find its policy has quietly become underinsured.
- The index follows an average: large individual changes (new machinery, expansion) need to be tracked with a manual notification instead.
What exactly does indexation do?
On the anniversary, the insurer raises the sums insured by an index – typically one tied to construction-industry and consumer price changes – and adjusts the premium to match. The goal is that a sum insured that was right last year stays right this year too: the same hall, the same machinery fleet now costs more to replace than it did last year. So a rising premium isn’t “more money for the same thing”, it’s following a larger amount of cover.
What happens if you reject it?
Skipping a year here and there isn’t yet a tragedy – five years is: the sums insured stay at the old level while prices have moved on, and the gap widens year after year. The ending is a familiar one: the pro-rata rule shows up at claim time. If premium is the concern, it’s worth discussing – freezing the sums insured is the worst way to cut the premium, because it hollows out the very cover you’re paying for. There are better tools: fine-tuning the deductible, adjusting the scope of cover – that’s what the deductible logic article covers.
What the index can’t do
The index tracks average price changes – it doesn’t see the company’s individual changes. A new production line, a warehouse extension, a stock level that has jumped are not a matter for indexation, but a notification matter: these need to be added to the policy by hand, as they happen. So the right routine is twofold: the index maintains things automatically every year, while the annual review checks once a year that the automation and reality are still running together.
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