Construction inflation and your property insurance

2022 started off with lots of media attention on the rising costs of construction. Building cost inflation has been unprecedented, with construction costs coming in between 25-30 per cent higher than they were in 2020. And 19 percent higher than 2021.

What does that have to do with property insurance?

Whether you’re a homeowner, or commercial property owner, you need to make sure your buildings are insured for replacement costs. When the construction industry is experiencing inflation, that means your replacement costs are increasing too.

IBC defines replacement cost as “Replacement cost is the cost of rebuilding your home in the event that it’s destroyed. It includes things such as construction materials, the price and availability of skilled labour, debris removal, extra expenses due to more demanding building codes, building permits and other criteria. Upgrades, renovations and other improvements can also impact the final replacement cost.”

Take a look at this excerpt from an article by the National Association of Home Builders as they explore different building materials.

Gypsum Products

The PPI for gypsum products (SA) was flat in April. Year-over-year, the prices of gypsum products are 17.8% higher and have increased 23.5% since January 2021.

Gypsum is just one of the many materials needed to repair or replace a building in the event of an insured loss. And it doesn’t take into account the rising costs of skilled labour.

How can you be confident your replacement values on your properties are correct?

Finding the sweet spot in insurance can be a tricky thing during times of construction inflation. Do nothing, and you can almost guarantee you’re underinsured. Just add 25 per cent to your replacement value and you’re most likely getting closer but you also risk being over insured and paying for coverage you don’t necessarily need.

For personal insurance, the best thing you can do is work with your insurance broker to make sure they have the most accurate and up to date information about your property. And while you’re at it, it’s a great idea to review your home inventory too. Here’s a brochure from IBC that has a handy checklist for you to help determine replacement value.

For commercial insurance, you’ll want to talk to your broker but you’ll also need to obtain a replacement cost appraisal. Try to make sure the appraisal company you choose has experience appraising properties in your industry.

And if stats are your thing check out the building construction price indexes, first quarter 2022.