Australian underinsurance hits crisis levels

Australians are putting their homes and livelihoods at risk by underinsuring their homes, according to an insurance expert.

MCG Quantity Surveyors Director, Marty Sadlier, said across multiple property sectors, Aussie assets were, on average, underinsured by 24 per cent.

“Our numbers show Australian property owners are skating on very thin ice, with many just one insurance event away from being hundreds of thousands of dollars out of pocket for repairs, putting them under extreme financial stress,” Mr Sadlier said.

“This is a significant figure when discussing the cost of rebuilding a property.”

He said residential property alone was underinsured by 18 per cent on average. 

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

“As such, many households will likely discover in the wake of a disaster that they can’t actually afford to repair or replace their home or investment.”

He said cost-of-living pressures were compelling some owners to ‘discount’ their premiums via underinsurance or even choose to cancel expensive insurance coverage, which is an incredibly risky decision.

Mr Sadlier said other sectors were even more dramatically impacted, with far-reaching consequences.

“Industrial and office properties are underinsured by 31 per cent and 24 per cent respectively,” he said.

“This delivers a massive blow to a business’s financials when the shortfall needs covering.”

The adverse outcomes would spread to the wider community as well, according to Mr Sadlier.

“It’s apparent few understand the monumental impact this can have on not just property,” he said.

“It fuels inflation which affects us all.

“In extreme cases, the result has been businesses essential to some communities being closed permanently.”

According to the Australian Bureau of Statistics (ABS), insurance premiums have increased more than 15 per cent in the past 12 months, well above the current Consumer Price Index (CPI).

Mr Sadlier said a combination of events has brought the market to this point, such as fast-rising construction costs, unreliable automated insurance calculators, Covid-related supply chain and manufacturing issues, and a lack of available labour.

“Perhaps the most concerning reason is the extraordinary increase in insurance premiums,” he said.

“Put simply, people and businesses can’t afford adequate cover… some are even choosing not to insure because the cost is so high.

“Certain assets have actually been categorised as uninsurable by insurers, while other properties have seen premiums skyrocket to such levels that business operations are no longer viable.”

Mr Sadlier said a spate of recurring natural disasters in recent years should heighten concern as there was every chance these events would continue.

“You can almost set your watch by them,” he said. 

“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.”

Mr Sadlier said solutions must be found before the next disaster hits.

“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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