Premiums go up as prices come down: Widespread falls in rebuilding costs have not stopped insurers putting up rates

THE house rebuilding index, which guides most insurers on how much cover home owners need, has been falling since it peaked last August.

Home owners will not see their annual premiums for buildings insurance drop, however, as the rates charged per pounds 1,000 of cover have been rising sharply.

Some insurers have even refused to track the index down, although they usually use it as the reason for increasing the amount of cover they require from home owners.

Buildings insurance is based on the cost of rebuilding the property in the event that it is destroyed, although claims for a complete re-build are rare. Most claims are to repair damage. The market value of the property is irrelevant.

The Royal Institution of Chartered Surveyors charts the cost of rebuilding and issues a widely followed monthly index.

Legal & General said that moving the amount insured with the index was not automatic. A spokesman said that customers did not like an automatic change. 'It is their responsibility to ensure that their home is adequately insured. It is open to them to ask to move the amount downwards in the light of falling rebuilding costs.'

Royal Insurance will also not be decreasing the sums insured in line with the index. 'Past experience shows that it is a short- term thing,' a spokesman said. 'In the main, people are only just adequately insured - more often than not, they are underinsured. This will give them a chance to catch up,' he added.

Others such as Commercial Union, Direct Line, Halifax Building Society, and Norwich Union automatically adjust the sum insured in line with the index.

While this is altered monthly, however, home owners only see an annual change when they renew their insurance - even if they pay the premiums monthly, they are instalments on an annual contract. But the insurers will pay the full cost of rebuilding if it becomes necessary during the year, even if the householder is technically underinsured.

Last July, the Norwich Union would have charged pounds 120 to insure a house in Nottingham that would cost pounds 60,000 to rebuild. A year later, the house would be insured for pounds 59,460, but the premium would have risen to pounds 154.60, because the rate charged has risen from pounds 2 per pounds 1,000 insured to pounds 2.60 per pounds 1,000.

Direct Line has a sophisticated system to make an annual adjustment on top of the monthly update to reflect regional changes in house-building costs.

These can vary enormously. For instance, in the year to January 1992 in Scotland and the North-west, rebuilding costs rose by between 3.4 per cent and 7.4 per cent. While in London and the Channel Islands - the most expensive areas - rebuilding costs fell by between 4.8 and 8.5 per cent.

In the East Midlands, the South-west, Yorkshire, Humberside, Northern Ireland and Wales the changes varied between a rise of 1.2 per cent and a drop of 2.2 per cent.

A Victorian terraced house in London covered for pounds 80,000 last July would have cost pounds 122 to insure based on a rate of pounds 1.60 per pounds 1,000 with a 5 per cent reduction for a pounds 25 excess. This month, it would be insured for pounds 74,000 for a premium of pounds 176, based on a rate of pounds 2.50 per pounds 1,000 with the same discount.

The same sort of house in Glasgow would have been insured for pounds 61,000 a year ago at a cost of pounds 93, based on pounds 1.60 per pounds 1,000. This month, it would be insured for pounds 63,000 at a cost of pounds 96 with the rate unchanged.

Direct Line is currently revising its building insurance contract and hopes to introduce a simpler system later this year.

Many home owners have suffered sharp increases in the cost of building insurance, because of the introduction of rating by post code rather than a flat-rate system. This has picked out the areas liable to subsidence, which can be extremely expensive to put right.

Commercial Union says that the introduction of post-code rating meant that 19 per cent had their rate reduced, 41 per cent had no change and 40 per cent suffered an increase. Of those with an increase, 9 per cent saw their rates rocket by 80 per cent.

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