Blog: What impact will construction costs have on underinsurance?

Already, it’s beginning to feel like the word ‘uncertainty’ is making a comeback this year, if it ever really went away. The combination of ongoing global economic and political volatility, supply chain challenges and shifting demand dynamics suggests construction costs could show an upward trend in 2025.

Construction inflation forecasts

The Office for National Statistics reported that UK construction inflation moderated slightly in late 2024, following the intense cost surges witnessed during the Covid-19 recovery and resulting from the war in Ukraine. However, forecasts for 2025 indicate a return to significant cost pressures. Industry analysts predict construction inflation will range between 3% and 6% in 2025, contingent on several factors:

1. Energy costs: Although energy prices have stabilised compared to their 2022 peaks, geopolitical tensions, particularly in Eastern Europe and the Middle East, could drive new volatility. Cement, steel and brick production remain highly energy-intensive, leaving these materials vulnerable to price fluctuations.
2. Labour shortages: The UK construction sector continues to grapple with skilled labour shortages, exacerbated by Brexit and an aging workforce. Higher wages to attract and retain talent are expected to contribute significantly to overall construction cost inflation.
3. Global supply chains: While some supply chain disruptions have eased, the lingering effects of Covid-19 and geopolitical instability, such as the conflict in Ukraine, persist. Stricter trade policies and potential sanctions could further strain the availability of key materials like timber and metals.
4. Environmental regulation: The construction industry’s push towards sustainability and net-zero targets is driving demand for low-carbon materials. While beneficial in the long term, these green alternatives often come at a premium, adding to near-term costs.

Mixed outlook for material costs

The cost trajectories of individual materials are likely to vary:

• Steel: A forecasted global slowdown in construction activity, particularly in China, may relieve some pressure on steel prices. However, high energy costs could offset these potential savings.
• Timber: Timber prices are projected to stabilise after the extreme spikes of recent years, but climate-driven disruptions to forestry could lead to localised shortages.
• Concrete and cement: These materials are expected to see steady price increases due to high energy inputs and strong demand for infrastructure projects.

On average, these properties are still only covered for 63% of correct reinstatement value, so there is a lot that needs to be done to tackle the problem.

Implications for underinsurance

We have all seen how rising construction costs can have profound implications for the UK insurance market, particularly regarding the adequacy of building sums insured.

Levels of buildings underinsurance reached a record high in 2022, affecting 83% of UK properties and at a time when construction inflation and material costs hit unprecedented highs.

Since then, progress has been made, with underinsurance now affecting 76% of buildings. However, this still leaves many property owners facing costly claims.

To mitigate the risks associated with construction inflation and underinsurance, insurers, brokers and property owners should consider two key areas:

• Regular valuations: Encouraging policyholders to undertake professional valuations of their properties ensures sums insured reflect current rebuild costs. This practice should be a routine part of policy renewals.
• Education and awareness: Insurers and brokers should proactively educate clients about the risks of underinsurance and the impact of rising construction costs. Transparent communication can help build trust and ensure informed decision-making. 

The outlook for construction inflation in 2025 highlights a challenging environment for the UK’s property and insurance sectors. Rising energy costs, labour shortages and sustainability initiatives are likely to keep construction costs elevated, with significant knock-on effects for rebuild values.

By proactively adapting to these challenges, insurers and property owners can protect themselves against the financial risks of underinsurance and ensure resilience in an uncertain economic landscape.

Ben Richmond is technical support manager at RebuildCostASSESSMENT.com

Sponsored