Australian building costs have continued to soar, but has your insurance cover kept pace?

• Rebuilding after a disaster is becoming more costly as construction and labour prices continue to rise.
• Underinsurance is continuing to grow as an issue, where the insured value of the property is lower than the current replacement cost.
• The issue extends beyond residential property and has the potential to cripple businesses.

The issue of underinsurance is back to the fore, with new analysis showing Australian assets are underinsured by 24%, on average.

Should the worst happen, Australians are likely to be hundreds of thousands short when rebuilding their homes, plunging households further into financial stress.

MCG Quantity Surveyors‘ analysis of over 2,000 reports across multiple property sectors unveiled the 24% shortfall, with underinsured homes likely to set owners back the equivalent of a couple’s yearly income should they need to rebuild.

“Residential property alone is underinsured by 18% on average.

“So, if a home’s true insurance value was $650,000, which is reasonably common, it’s owner would be up for around $117,000 to cover the shortfall in replacing their destroyed property.”

Marty Sadlier, MCG Quantity Surveyors

Unfortunately, Sadlier said that many households are likely to only find out about this shortfall in the wake of a disaster.

“In addition, cost-of-living pressures are compelling some owners to ‘discount’ their premiums via underinsurance or even choose to cancel expensive insurance coverage which is an incredibly risky decision,” Sadlier added.

Not the first instance of underinsurance

Earlier in the pandemic, Sadlier was sounding the alarm on underinsurance when the price of construction was rocketing at breakneck speed.

“In 2020, Canstar research concluded that 83% of Australians were underinsured. Then in 2021, the Australian Bureau of Statistics (ABS) noted that 2.44 million Australian households have no house and contents insurance – that’s 23% of all Australian homes.”

Not too long after that, in 2022, Ben Plohl also put the underinsurance issue into the spotlight, with the proportion of underinsured homes then forecasted to go above 90%.

The issue of underinsurance could be as dire as to lead to homelessness, with MCG Quantity Surveyors’ Mike Mortlock highlighting the potential complexity of the issue and the domino effect it could have.

Other property sectors not immune

While the going is tough for homeowners, underinsurance in other property sectors is even more dire. Not only is the magnitude greater, but the flow on effects are much further reaching.

“Industrial and office properties are underinsured by 31% and 24% respectively. This delivers a massive blow to a business’s financials when the shortfall needs covering,” said Sadlier.

“It’s apparent few understand the monumental impact this can have on not just property owners but consumers and the economy as well. It fuels inflation which affects us all. In extreme cases, the result has been businesses essential to some communities being closed permanently.

The magnitude of underinsurance across various property sectors

Source: MCG Quantity Surveyors.

Why are we here?

The culmination of multiple challenges has led to the underinsurance crisis, with Sadlier noting that escalating construction costs, unreliable automated insurance calculators, Covid supply chain and manufacturing issues, and lack of labour are among the contributing factors.

“Perhaps the most concerning reason is the extraordinary increase in insurance premiums. Put simply, people and businesses can’t afford adequate cover; some are even choosing not to insure because the cost is so high.”

Marty Sadlier, MCG Quantity Surveyors

He added that some assets have become uninsurable, while others have seen premiums soar to unaffordable levels, meaning business operations are no longer viable.

The spate of recurring natural disasters across recent times should also be cause for concern, with Sadlier noting:

“You can almost set your watch by them. Each year – usually around December and January – we’ll see reports of floods or fires devastating communities and bringing things to a halt.

“Unfortunately, many homeowners, business owners and commercial investors will discover all too late that their insurance arrangements are woefully inadequate.”

Sadlier called for everyone to address the situation urgently.

“Steps taken to address the situation are both important and urgent,” he said.

“Firstly, owners must get their property’s insurance value accurately assessed and regularly updated in this fast-moving construction cost environment.

“There is also a role for government to play here.

“I believe regulation is crucial to stop the insurance industry from quoting outrageous premiums that are decimating businesses and leaving Australians at risk of going broke.”

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