Review Sums Insured

The insurance protection gap

Under-insuring assets is a risk few can afford to take.

Under-insurance occurs when the sum or amount insured is less than the cost of replacement of the insured property at the time of loss, resulting in a proportionate reduction in the claim payment.

In the event of a claim, especially one involving a total loss, property owners are left with a shortfall known as the insurance protection gap.

This can happen when property owners rely on historical data, for example, the price at the time of purchase. It can also happen when calculations don’t include things like demolition costs or renovations that have uplifted value.

Underinsurance can have wide-ranging impacts, including creating financial hardship. For example, if a business is damaged by flood or fire, there may be insufficient funds available to replace or rebuild the assets. 

The business will need to source additional funds to return to an operational state, adding significant stress to an already traumatic event.

Failing to update sums insured could put your property at risk  

From supply chain disruption to rising interest rates, geopolitical tensions and tradie shortages, the cost of replacing lost or damaged property continues to increase.

This includes your premises, assets such as vehicles, plant, equipment, machinery, and contents, including goods and stock on hand.   

With changes and disruptions happening at unprecedented levels, the sums insured that covered your property twelve or even six months ago, may no longer be sufficient.

Bi-annual valuations are strongly encouraged to provide protection from critical financial loss during a claimable event.

Economic conditions affecting property insurance

Another way property owners can find themselves underinsured is when macro and micro economic factors impact the cost of repairs, replacements and rebuilds.

Outlined below are some of the factors having a significant impact.

Construction costs

The Australian Bureau of Statistics (ABS) Producer Price Index (PPI) May 2026 data shows that while construction cost growth has moderated from post‑pandemic highs, it is still above long-term averages.

Construction costs are forecast to continue increasing across most capital cities. As these trends will impact the cost to rebuild, it’s important to review sums insured regularly.

Cost of building materials

Material cost inflation has stabilised in some categories but remains volatile and uneven in 2026. For example, copper pipes have increased 25% since 2025 and are up 10% in the last quarter alone. Concrete, timber, plasterboard and bricks have also trended upwards in price.

Replacement calculation costs need to reflect the current pricing, as opposed to the cost at the time of purchase, and be reflected in the sums insured.

Availability of building materials

Strong housing and infrastructure pipelines continue to sustain high demand for key inputs such as concrete, timber and electrical materials. While availability has improved from Covid-related shortages, the sustained high demand can cause longer lead times, higher procurement costs and temporary supply shortages.

Government housing targets (1.2 million homes by 2029) and the expansion of data centres are expected to maintain pressure on supply chains.

This can impact rebuild timeframes, potentially increasing business interruption costs and the duration of claims.

Tradie and labour shortages

Labour availability remains a critical constraint. ABS data shows job vacancies across Australia have increased by 2.7% since November 2025, with 21,600 vacancies in construction. It’s estimated Australia will need another 116,700 construction workers to meet government housing targets. This shortage is across most trades, including electricians, carpenters, builders and plumbers.

For those trying to rebuild or replace, this can mean longer wait times and higher costs.

Supply chain disruptions

Worldwide supply chains continue to be impacted by the effects of geopolitical tensions on shipping freight. The Red Sea shipping crisis has added up to two weeks to transit times, materially increasing fuel and freight costs.

In addition, freight rate baselines are being driven up by fuel consumption, asset utilisation and insurance and risk premiums. This can mean imported goods and materials can take longer to arrive and cost more.

Inflation

Inflation has re‑accelerated in 2026, reversing some of the easing seen in 2024–25. The annual Consumer Price Index (CPI) increased 4.6% in the 12 months to March 2026, well above the Reserve Bank of Australia’s (RBA) 2–3% target range. Housing is in the top three contributors to annual inflation.

Inflation erodes the adequacy of sums insured, particularly for assets not revalued annually.

Rising interest rates

Interest rate pressure has returned in response to renewed inflation. The RBA cash rate sits at 4.35% as at May 2026, following three increases early in the year.

Higher borrowing costs are impacting development feasibility and project timing, which
may reduce building activity. This can also increase valuations and replacement cost assumptions embedded in sums insured.

Natural disasters and extreme weather

Extreme weather events remain a major structural driver of costs. Key findings from APRA’s Insurance Climate Vulnerability Assessment indicate over $16B in annual losses are expected from weather events by 2050.

Climate-related risks place upward pressure on premiums, as well as the broader economy. The reconstruction surges that follow events form acute short-term pressure on pricing and availability, which is exacerbated by the shortages in tradespeople.

Geopolitical conflict

Geopolitical instability contributes to persistent cost volatility, making accurate asset valuation more difficult and dynamic.

The availability of commodities, including metal, minerals, energy and fertilisers, continue to be significantly disrupted by conflict in Eastern Europe. Constrained production and disruptions to trade at ports is causing short supply and driving up international prices.

Geopolitical instability in the Strait of Hormuz is significantly disrupting cargo movement, leading to shipping delays, route diversions, port congestion and increased exposure to loss or damage while goods are in transit.

In certain regions, these elevated risks may also trigger additional policy exclusions or higher excesses under marine cargo insurance.

Key takeaway

It is likely to cost materially more to rebuild or replace insured property and contents in 2026 than even a year ago, and this trend is expected to continue.

Policyholders should regularly review their sums insured to reflect current replacement costs, to avoid underinsurance in the event of a claim.

Sums insured – how it works

The policyholder is responsible for nominating the amount of sum insured.

The amount nominated should equal the amount of money needed today to replace the property and its contents if they are damaged, destroyed or lost due to an insured event.

Insurers use the declared sums insured to assess the risk being insured and to determine the appropriate premium and policy terms, including any limits, conditions and exclusions.

The sum insured will generally represent the maximum amount payable under the policy in the event of a claim. Where the sum insured is less than the actual replacement cost, many policies apply an average provision, which reduces the claim payment proportionately.

An average provision works like this:

A property worth $1,000,000 is insured for a sum of $500,000 which is 50% of the value

It suffers a loss of $200,000

The insurer applies an average provision and pays 50% of the loss, $100,000

The policyholder must cover the remaining $100,000 themselves.

Some policies also include features such as indexation or a reinstatement margin, for example an additional 10–30% above the sum insured in certain circumstances.

These features are designed to help address increases in rebuilding costs and reduce the risk of underinsurance. However, these features vary between policies, and it is important that policyholders review their terms carefully to ensure adequate cover.

The dos and don’ts of sums insured

Engage a quantity surveyor, building consultant or other suitable qualified professional for the most accurate rebuild costs. It is particularly important to use a quantity surveyor to complete a valuation for higher value or bespoke assets to help determine the full replacement value.

Be cautious when using online calculators for high-value or complex properties—these tools are not always tailored to unique property features and may lack precision.

Base building sums on the cost of replacing the building structure itself, its fixtures, such as lights, ceiling fans, central heating/cooling systems, built-in shelving units and cabinets, bathroom fittings, main plugs and sockets, and features like sheds, decking, driveways and fencing.

Ensure the calculations are based on current building costs as prices for materials and labour have increased significantly.

Factor in structural improvements that have been made to the property, like sheds, decking and fencing.

Be mindful that all the cost variables are accounted for, including:

the cost of removing debris

the cost of engaging an architect and council fees

Inflation and exchange rates.

Base contents replacement on a new-for-old basis and include cover for contents (and stock if you are a business), not just the building.

Be sure the sums are adequate to cover the number and value of assets, especially if contents have been added, replaced or upgraded with better quality and more expensive items.

Make sure the calculations account for current building standards to be implemented. Risk mitigation requirements, such as bushfire, cyclone or flood protections can add substantially to re-build costs.

Don’t

Don’t base the building sum on the following as these valuations are not based on replacement costs:

market value (based what the property could sell for)

rates valuation (based on the Gross Rental Value your council uses to work out your rates)

bank valuation (if the property is mortgaged).

Don’t include the cost of the land, just the property/structures built on it.

Don’t use the original purchase prices to determine contents replacement costs.

Don’t base the sums on the value of assets in the balance sheet – these figures will factor in depreciation (written down value) and are not an accurate representation of the actual cost to replace them at the time of a loss.

Don’t assume that a policy’s indexation clause or safety-net/reinstatement margin will protect against underinsurance.

Additional considerations for commercial property

Most commercial property insurance policies have what is called a co-insurance clause.

The co-insurance (or average) clause reduces the amount an insurer pays out on a claim because the sum insured is lower than the value of the property. 

If the policyholder has substantially underestimated what it will cost to repair or replace their property, then they will need to make up any shortfall between what their insurer will pay and what it will actually cost to reinstate the property.    

Because sums insured needs to adequately reflect today’s costs and risks, it is prudent to review and update expected reinstatement periods for tangible assets to reflect changes in supply chains and prices. Doing this will help reduce the risk of under- and over-insurance should a claim arise.

Mid-term review 

Given the current economic conditions, more frequent reviews may be prudent. Policyholders are urged to carefully consider their insurance requirements outside the usual 12-month cycle, with particular emphasis on property sums insured.  

Work with your EBM Account Manager to make sure the insured amounts will adequately cover the value of your assets. We can help you:

Identify the risks – from physical risks such as flood, bushfire and crime rates, to financial and reputational risks.

Consider policy options – including features, coverage, claim limits, excesses and premiums.

Understand policy inclusions and exclusions – what the policy does and does not cover, and in what circumstances.

Engage a quantity surveyor to determine premises replacement costs.

Check the sums insured and limits of liability reflect the values and risks of your assets.

Discuss risk mitigation strategies including transferring risks to insurers.

For business owners, confirm you are meeting your requirements under cover i.e. contract terms and conditions (including disclosure).

Ensure your business inventory and valuations are up-to-date and reflect current costs.

Understand what is happening in the insurance marketplace – a favourable property market can see improved outcomes for both standard and more complex risks.

Be sure to tell your EBM Account Manager about any changes in circumstances that may impact your cover, to avoid the risk of payouts reduced, the claim denied, or the contract cancelled.  

Here to help

Your EBM Account Manager has the expertise and resources to guide you through the sums insured assessment process and help you protect your assets from the risks you face.

If you have any questions, please contact your EBM Account Manager on 1300 755 112.