Falling Pacific rates expose businesses to underinsurance

Construction inflation is forecast to reach 6% by mid-2026.

Commercial insurance rates across the Pacific region fell by 12% in the first quarter of 2026, marking the most positive renewal conditions for businesses in several years.

However, Marsh said that falling premiums are masking a growing risk of underinsurance, as the cost of rebuilding and replacing assets continues to climb.

Whilst insurance costs have softened, broader economic inflation remains elevated. Australian Consumer Price Index (CPI) inflation hit 4.6% in the year to March 2026 before easing slightly to 4.0% in May. 

Despite this dip, the Reserve Bank of Australia’s preferred measure of underlying inflation, the trimmed mean, unexpectedly rose to 3.6% over the same period. 

In New Zealand, CPI inflation was recorded at 3.1% for the year to March 2026, remaining above the central bank's target ceiling.

The construction sector is experiencing particularly high inflation, which is forecast to reach 6% by mid-2026. 

This surge is driven by high material costs, supply chain disruptions, and severe labour shortages. 

Geopolitical conflicts in the Middle East have disrupted shipping through the Strait of Hormuz, increasing fuel and freight prices. 

Although diplomatic progress in June 2026 signalled potential de-escalation, these elevated costs are expected to persist.

The construction industry remains highly vulnerable to fuel volatility, with more than 75% of heavy equipment relying on diesel. 

Furthermore, the cost of plastic pipe products has risen by up to 36%, whilst prices for concrete, cement, sand, copper, and electrical products face ongoing upward pressure.

Additionally, business interruption indemnity periods set two to three years ago may no longer be long enough to cover extended modern repair timelines.

When underinsurance occurs, insurers can apply an "average clause" to reduce payouts proportionally for both total and partial losses. 

For example, if a building insured for $10m suffers $5m in fire damage, but the insurer determines the true replacement cost is actually $20m, the property is 50% underinsured. Under the average clause, the payout would be cut by half, leaving the business with $2.5m.

To mitigate these risks, financial advisors recommend that companies undergo professional asset valuations every two to three years and conduct annual reviews of their indemnity periods.