Australians are world-renowned for their laidback attitude, but when it comes to insurance, this easygoing approach can lead to costly oversights. Underinsurance—where your cover is less than what you’d need to recover financially after a disaster—remains a persistent issue. With recent climate events and 2025 policy updates shaking up the insurance landscape, it’s never been more important to ask: are you really covered?
What Is Underinsurance and Why Does It Happen?
Underinsurance occurs when your insurance—be it home, contents, life, or business—is insufficient to cover the actual cost of loss or rebuilding. The Insurance Council of Australia (ICA) estimated in early 2025 that as many as 4 in 5 households may be underinsured, especially as inflation pushes up rebuilding costs and property values. But why is underinsurance so common?
- Rising Costs: Construction costs and property values have surged in 2024–2025, outpacing many policyholders’ coverage updates.
- ‘Set and Forget’ Mentality: Many Australians renew policies automatically, failing to review sums insured or changes in circumstances.
- Complexity of Insurance Products: Jargon and policy fine print make it easy to underestimate what’s truly covered.
- Natural Disasters: Floods, bushfires, and storms—common in recent years—highlight gaps in coverage, especially with exclusions or caps.
Real-world example: When devastating floods hit Far North Queensland in February 2025, thousands discovered their policies didn’t cover full rebuild costs or excluded flood damage altogether, leaving homeowners with substantial out-of-pocket expenses.
2025 Policy Shifts: What’s Changing in Insurance?
This year has brought significant developments aimed at tackling underinsurance. Key 2025 changes include:
- Revised Building Codes: The Australian Building Codes Board updated standards to improve resilience to natural disasters, which often increases rebuild costs—and insurance premiums.
- ICA’s New Disclosure Rules: Insurers must now provide clearer, more prominent explanations of policy exclusions, sub-limits, and optional covers, making it easier for consumers to understand their real protection.
- Federal Government’s Disaster Insurance Pool: Launched in late 2024, this pool aims to lower premiums in cyclone-prone regions, but policyholders still need to check if their sums insured match actual rebuild costs.
- Inflation Adjustments: Many insurers are now automatically indexing sums insured to better match inflation and local building costs—but this isn’t universal, and the adjustment rate may lag behind real market conditions.
These changes are designed to increase transparency and affordability, but the responsibility for updating and understanding your cover still rests with you.
How to Safeguard Against Underinsurance
Protecting yourself from underinsurance requires a proactive approach. Here’s how to close the coverage gap in 2025:
- Review Your Policy Annually: Don’t wait for renewal. Check your sums insured, policy exclusions, and any changes in your circumstances—such as renovations or big-ticket purchases—at least once a year.
- Use Online Calculators: The ICA and major insurers provide updated calculators to help estimate the true cost of rebuilding or replacing your home and contents in your postcode.
- Factor in All Costs: Consider demolition, debris removal, and architect fees, not just the rebuild or replacement value.
- Ask for Policy Clarity: With new 2025 disclosure rules, don’t hesitate to contact your insurer for plain-English explanations of exclusions and limits.
- Consider Specialist Cover: If you’re in a high-risk area (e.g. flood or cyclone zones), review the Disaster Insurance Pool options and ensure your policy covers natural disasters relevant to your location.
- Document Your Assets: Keep a digital inventory of your possessions with receipts and photos—especially for high-value items.
Example: After a major home renovation in Sydney’s Inner West, the Smith family increased their sum insured by $300,000 in early 2025, following their builder’s updated costings. When a severe hailstorm damaged their new roof months later, their proactive approach meant their insurance fully covered the repairs—unlike many neighbours who faced shortfalls.
Conclusion: Don’t Let Underinsurance Derail Your Recovery
With inflation, climate risk, and policy complexity on the rise, underinsurance remains a silent threat to Australian households and businesses. The 2025 reforms make understanding and updating your cover easier, but the onus is still on you to make sure your policy keeps pace with your real-world needs.
