Index linking is a method of ensuring your sums insured are keeping pace with inflation and other factors that affect prices and helps to prevent you being underinsured when you renew your building or contents policy.
To give an example; when you renew your buildings insurance, your insurer will usually apply the current percentage of index linking supplied by the Royal Institute of Chartered Surveyors (RICS) to the rebuild sum insured for the property. Index linking takes into consideration the costs of raw materials, labour, demolition, waste removal, professional service fees, and other necessary expenditure. This calculation gives a more accurate rebuilding cost than would be obtained by simply estimating the increase based on inflation.
In a similar way, contents insurance is usually index linked, helping to ensure your renewed policy covers the actual cost of replacing your belongings. Insurers will make this calculation by using an appropriate index to gauge any price increase - common indices used include the Consumer Durables Index and the Consumer Price Index.