What is 'indexed insurance' in personal lines?

Indexed insurance refers to a policy type designed to adjust coverage limits according to specific indices, such as inflation or other relevant financial metrics. This approach ensures that the coverage remains adequate over time, reflecting the changing value of money and the cost of replacing insured items. For instance, if inflation causes the cost to rebuild a home to rise, indexed insurance would automatically increase the coverage limit to match this new cost, thereby providing continuous and relevant protection for policyholders. This proactive adjustment helps safeguard against the possible underinsurance that can arise when policy limits remain static even as values increase over time.