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Is recent inflation leaving you underinsured?

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With inflation hitting a 30 year high, it’s time to re-evaluate your insurance policy to make sure you’re adequately insured.

The Australian Institute of Quantity Surveyors (AIQS) earlier this month voiced concerns that homeowners and construction companies could be left underinsured following rising inflation and the increasing cost of materials.

If homeowners took out insurance policies more than 18 months ago, then they would have estimated how much a rebuild would cost based on past prices.

In 2022 we have seen a surge in construction material prices thanks to COVID delays and rising inflation.

This means many homeowner policies would not adequately cover rebuild costs in the event they were to lose their home, and they would be left to pay the difference out-of-pocket. And this shortfall could be significant considering the rapid rise in construction prices.

A report carried out by Canstar on behalf of the Insurance Council of Australia found about 83% of Australian households were underinsured, although AIQS estimates it could be as high as 90%.

This means more than four in five Australians are at risk of not being able to completely replace their homes if there was a claim.

“It is scary for homeowners, especially in the wake of recent natural disasters we are seeing across Australia, that they could be left significantly out of pocket if the worst were to happen,” says Jody Williams, Insurance Broker at Oracle Group.

Strata companies to be vigilant of rising costs

Along with homeowners, strata managers should also be aware of rising inflation and check when their building sum was last updated. If it has been more than 12 months, it’s strongly recommended to obtain a new valuation.

Next, strata owners need to look at what level of indexing applies to the sum insured on the renewal, to ensure they are not falling behind in their insurance.

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It’s also important to note that the cost of construction has risen roughly 18% over the past 18 months, which is significantly outpacing the rise in CPI, which has only gone up to about 5%.

“If you manage a strata then you need to make sure you’re covered for full replacement and reinstatement value, as well as any removal costs and professional fees,” says Jody.

“The price of these rising construction costs needs to be taken into account when reassessing your insurance policy.”

Construction companies also inadequately insured

Construction businesses also need to be wary of rising costs, and double check they are properly protected from damage or theft.

Reinforcement materials alone have climbed from $1,330 a tonne in mid-2020 to $2,400 a tonne in April this year.

Most notably, the cost of timber, steel and concrete has climbed significantly.

While insurance policies often input an ‘escalation allowance’ of between 10 and 15%, this won’t currently be enough to provide adequate protection for many contractors, due to rapid inflation.

And in some cases, if an insurance contract is signed for a value that already exceeds the policy limit that was agreed, the contractor may not be entitled to an escalation allowance at all.

A good insurance broker should recommend you set your annual maximum project value limit each year with a buffer of about 10 - 20% so you don’t end up underinsured.

“But obviously, you don’t want to set your limit unrealistically high, as this will increase your premium and excess - and sometimes it can be a challenge to get this balance right,” says Jody.

If you are uncertain as to whether you are underinsured, best practice would be to get your property evaluated to check what it should be in your policy.

In partnership with MCG Quantity Surveyors, Oracle Group offers this service for a flat fee of $600+GST, which you can sign up to here.

Jody also specialises in construction insurance, and you can reach out to her to double check if your policy is up-to-date so you’re not left out-of-pocket if a disaster were to strike.

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General Advice Warning: This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is appropriate for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement.

All information above has been provided by the author.

Jody Williams - Oracle Group Insurance Brokers, ABN 75 131 025 600, AFSL 363610