What is underinsurance? The hidden risk facing 70% of Australian businesses

What is underinsurance? The hidden risk facing 70% of Australian businesses

In a recent interview with the Australian Financial Review (AFR), Matt Bacon (CEO, Howden Pacific region) brings attention to a critical vulnerability that persists across Australia’s middle market business sector – underinsurance. 

Despite Australia often being synonymous with economic resilience, he explains that around 70% of businesses are underinsured, with an average shortfall of 30% across property and assets.¹ This isn’t just a statistic, it represents a systemic risk within the economy which threatens significant financial loss for these businesses.

The hidden costs of underinsurance

Underinsurance isn’t a novel issue, though it’s becoming more urgent and warrants increased attention. Research shows that underinsurance is alarmingly common among SMEs, which account for 98% of Australian businesses and employ 70% of the workforce.² Small businesses often lack the resources or information to secure adequate insurance, leaving them exposed to a complex risk landscape which can result in major financial and reputational loss.

Matt warns that "the downstream economic flow of that underinsurance is businesses not being able to get back on their feet post a major loss, and it becomes a real economic timebomb."

Types of underinsurance: how do I know if my business is underinsured?

Underinsurance manifests across several critical areas, with some of the most prominent being:

Property Sums Insured: Too many businesses rely on outdated market or book values, that fail to account for inflation, regulatory changes, or actual replacement costs. Matt states that ‘’non-residential inflation has gone up 27% since COVID, so unless you are utilising a consultancy service from a broker ... you haven’t had your property and your assets revalued’’ and ‘’if inflation has grown at 27%, you are likely to be 30% underinsured and it becomes a seismic issue over time’’.

Annual inflation continues to be driven by supply chain constraints, labour shortages and global inflationary pressures. While inflation has cooled from its 2022 peak of 11-12%, it continues to track above CPI, meaning replacement costs are still rising faster than general consumer prices.³ Regional and state-level differences in inflation mean that a one-size-fits-all approach to insurance valuation is inadequate. Both macro and microeconomic conditions must be considered when assessing risk.

Businesses Interruption (BI): This is arguably one of the most overlooked areas. Many businesses choose indemnity periods that are too short, through underestimating the time needed to recover. Poor business continuity planning, supply chain disruptions and regulatory delays can mean recovery time extends far beyond initial expectations. Importantly, BI insurance must reflect the time to return to pre-loss profitability, not just to rebuild. 

Liability insurance: Public, product and professional liability limits are often decided based on minimal contractual requirements rather than actual exposure. This leaves businesses vulnerable to major legal claims. 

Excluded Critical Perils: In an era of climate volatility, risks like floods, bushfires and extreme weather events are becoming increasingly important to mitigate against. Australia’s geographical positioning makes these risks particularly acute. The same goes for cyber risk - Australia’s among the top five most targeted countries globally according to multiple threat intelligence reports.

As Matt highlights "ten years ago, we weren’t really talking about cyber and now cyber is a major discussion point in pretty much every board table around the country"

Underinsurance: more than just insufficient coverage

Underinsurance has more complex ramifications beneath the surface. It doesn’t just mean insufficient coverage, it can also trigger averaging clauses, reducing payouts even further. Businesses with undervalued assets may find themselves receiving only a fraction of the sum of their expected claim settlement, compounding the financial fall out.

While exact figures vary, industry estimates suggest that a significant proportion of businesses, some citing as high as 78%, struggle to recover after a major uninsured or underinsured event. Insurance has the ability to restore a business to its pre-loss position, but that cannot be achieved without a well-designed and regularly reviewed insurance strategy. 

Why then is underinsurance so common?

Several factors contribute to this widespread issue:

• Cost pressures – SMEs often cut or limit insurance to manage other expenses
• Lack of annual review – many brokers and clients alike face time constraints, leading to insurance renewals without proper reassessment
• Avoidance of difficult conversations – some brokers may hesitate to push for higher coverage due to retention concerns
• Limited scalable tools – your broker needs to be accessing the best tools to provide true risk advice, existing calculators can be inconsistent
• Inflation and regulatory changes – asset replacement costs escalate rapidly, leaving sums insured lagging
• Limited understanding of risk – many business owners don’t fully grasp their interruption or liability risks, especially within their supply chains

Addressing underinsurance with a strategic approach

Solving underinsurance requires more than just securing coverage, it demands a risk-first strategy. In today’s economic climate businesses should be looking to:

• Engage with a broker who prioritises risk identification and mitigation
• Review declared values annually, especially for property and liability
• Consider emerging risks that require specialised solutions like cyber, ESG, and climate-related exposures
• Match indemnity periods to realistic recovery times 
• Understand and mitigate against supply chain vulnerabilities and build resilience

Today "brokers play a vital role in helping businesses understand their risks and build long-term resilience, not just selling insurance’’ – Ashley Grant (Head of Risk Advisory, Howden Pacific region)

How Howden can help

Underinsurance isn’t just a financial oversight; it’s a strategic risk. Whether you're an SME or a mid-market business, ensuring your insurance programme reflects the true value of your assets and operational risks is essential to long-term resilience.

Get in touch with Howden’s Risk Advisory team to assess your current coverage, identify gaps and vulnerabilities and build a tailored risk management plan that aligns with your strategic business goals. 

¹James Thomson, British giant Howden says 70pc of Australian business underinsured, Australian Financial Review, 29 July 2025, https://www.afr.com/companies/financial-services/british-giant-howden-says-70pc-of-australian-business-underinsured-20250729-p5miou [accessed 5 August 2025].
²Australian Banking Association, Small Business, Australian Banking Association, https://www.ausbanking.org.au/Small-Business/ [accessed 6 August 2025].
³Reserve Bank of Australia, Inflation, Statement on Monetary Policy – February 2023, Reserve Bank of Australia, https://www.rba.gov.au/publications/smp/2023/feb/inflation.html [accessed 6 August 2025].