House rebuilding costs have fallen, but this does not necessarily mean home insurers are dropping their prices, writes CAROLINE MADDEN.

FOR THE first time in at least 15 years, house rebuilding costs have fallen. Due to the sharp drop in activity in the construction sector, builders are becoming more competitive and cutting their prices.

This trend is evident in the latest figures published by the Society of Chartered Surveyors (SCS), which show that house rebuilding prices dropped by between 4 per cent and 5 per cent, depending on the region, in the year to March 2009 (see table).

So, if it now costs less to reconstruct a home following a disaster such as a fire, surely householders can look forward to significantly cheaper home insurance premiums? Unfortunately, as is often the case with insurance, it’s not that simple.

Andrew Nugent of the SCS expects that premiums will be pushed downwards, but says a 5 per cent drop in rebuilding costs will not necessarily translate into a 5 per cent fall in a premium.

Home insurance policies typically comprise two main elements: buildings insurance, which covers damage to the house itself; and contents insurance, which covers the damage or loss of house contents.

The building insurance element of the policy depends on the “sum insured”, which should be the amount it would cost to rebuild the entire property. (This is not, as sometimes assumed, the same as the property’s market value.)

Even though the sum insured may fall as a result of cheaper building prices, Michael Horan of the Irish Insurance Federation (IIF) says another key factor is at play when it comes to setting premiums. “Ultimately premiums are dictated by the cost of claims,” he says, “and household premiums are generally on an upward trend at the moment, after five years of falling premiums.”

The insurance industry was hit by the “most serious flooding event” on record last August, and burglaries are on the increase, he says. Because of this, household claims have risen, with the result that underlying insurance rates are also on the up.

“If your sum insured comes down, that obviously will have an effect on the premium because the rate is being applied to the sum insured,” Horan says.

However, while this may negate rising rates to an extent, Horan expects that the net effect may be that premiums rise.

Nevertheless, it is important that householders check that their home is insured for the correct amount. “It is your responsibility to set your building sum insured,” Horan says.

“It’s important that it’s adequate, as it is the most that would be paid in the event of loss.”

The SCS explains that if, for example, an individual insures their home for €270,000 but the total reinstatement cost is €360,000, they would only receive €270,000 to rebuild the house in the event of a total loss. The insured person would therefore have to pay the balance of €90,000 themselves.

Even if the claim was only for a partial loss costing €60,000 to repair, the householder would only receive €45,000 (€60,000 x €270,000/€360,000), reflecting the extent to which they are underinsured. They would have to pay the balance of €15,000.

“It is essential that you reassess your level of cover every year, based on current rebuilding costs, making allowances for any improvements or extensions that you may have made since your last renewal date,” the SCS advises.

So how do you make sure that you insure the correct amount? The SCS publishes a leaflet on its website, www.scs.ie, that provides step-by-step guidance on calculating the minimum value for which you should insure the structure of your house.

It is generally a good idea to carry out this exercise every year when renewing your policy.

If householders find that they are overinsured, Horan says they are within their rights to request that the insurance company reduces the sum insured to the correct level.

He adds that some householders never carry out this exercise. If this is the case and they bought their home 10 or 15 years ago, they may well find that they are underinsured. However, many insurers index link the amount insured, so that it automatically increases in line with inflation at the renewal date each year.

Now that the SCS figures show that rebuilding costs are falling, will the reverse apply? Will insurers automatically reduce the sum insured each year?

It appears not. Hibernian Aviva, for example, monitors a range of indices and guidelines for the purposes of buildings and contents indexation. Although it includes the SCS housebuilding cost guidelines in this exercise, the insurer also takes into consideration the consumer price index from the Central Statistics Office, independent economic reports and its own claims cost data.

Based on a review carried out in January 2009, Hibernian has reduced its buildings and contents indexation rate to 0 per cent as of April 1st – notwithstanding a 2.6 per cent drop in the consumer price index, a decline in all independent economic reports and the SCS survey. “This means we are not automatically increasing sums insured on our home renewals,” Hibernian explains. But neither are they reducing them.

“We are also advising our policyholders to review all their sums insured carefully at renewal to ensure that the buildings sum insured is sufficient to rebuild their house and that the contents sum insured is adequate to replace their contents as new,” the insurer advises.

The SCS’s Nugent predicts that the trend will continue, ie that house rebuilding costs have not bottomed out yet. However, unless the price-fall outpaces the increase in insurance claims costs, homeowners are unlikely to see a significant fall in their home insurance policies any time soon.

The Society of Chartered Surveyors' Guide to House Rebuilding Costs March 2009is available on www.scs.ie