Construction costs and premium rates are moving in opposite directions, reflecting a “soft market paradox” that can increase the risk of underinsurance, Marsh has warned.

“While rates have softened, the cost of replacing, rebuilding and recovering from a loss continues to rise,” the broker says in a guide on inflation impacts.

Marsh notes easing premiums and positive renewal conversations can create a sense of comfort, and the pressure to update declared values may feel less acute compared with two or three years ago. But a cheaper premium is not the same as better protection, and inadequate declared values will often show up when there is a claim.

Construction sector inflation is running ahead of the wider Australian consumer price index, driven by material and labour costs, as factors such as compliance requirements and exchange rates also add complexity.

Australia’s construction sector is also more exposed to fuel volatility than comparable economies, given a reliance on diesel for transportation.

“The underlying cost of replacing and reinstating physical assets has not softened in line with the insurance market,” the broker says.

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“The reality is the risk of underinsurance is not decreasing – it is building up quietly against the backdrop of favourable market conditions, which can often mask the issue.”

Marsh warns against using a single, broad index such as CPI to update asset values, and urges insureds to consider specific and unique attributes that contribute to reinstatement costs.

It also says business interruption remains one of the most underestimated and underdeclared areas of an insurance program.

“Inflation, energy price volatility and supply chain disruption driven by geopolitical conflict continue to affect the cost base of most Australian businesses,” it says.

“From a business interruption perspective, insureds need to consider how these factors should be incorporated into declared values.”

The guide is available here.