Underinsurance poses a risk of going broke

Insurance – most people have it, rarely use it, but in times of crisis, rely on it.

During some of the most testing times in our lives, we need to draw on our insurance protection in order to survive, rebuild, and carry on, without this protection, it would be very difficult to retain the status quo.

What is surprising, that as insurance is so critical to home owners and business being able to move forward in a crisis, many will struggle to rebuild like for like due to the high numbers of policy holders being markedly underinsured.

Industry-first data compiled by a leading insurance expert has revealed the dire extent of Australia’s under-insurance crisis, and the fallout could be devastating.

MCG Quantity Surveyors analysis of more than 2,000 reports revealed that across multiple property sectors, Aussie assets were, on average, underinsured by 24 per cent.

MCG Quantity Surveyors director Marty Sadlier said their 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.

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

“Residential property alone is underinsured by 18 per cent 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.

“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.

“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.”

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.

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

The adverse outcomes will 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 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.”

MCG explain that a combination of events has brought us 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.

Mr Sadlier said 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.

“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 will continue.

“Solutions must be found before the next disaster hits and steps taken to address the situation are both important and urgent.

“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 as risk of going broke.”