The 2025–26 Federal Budget represents a meaningful shift in Australia’s economic policy settings, moving away from the existing short-term cost-of-living measures toward structural reforms that will reshape how property is owned, developed, and transferred over the coming years. While much of the public commentary has focused on the fiscal and investment dimensions of these changes, the insurance consequences for Australian property owners deserve special focus.
The property insurance market does not exist in isolation from broader economic and policy settings. Insurers price risk, set terms, and respond to claims within the same environment these reforms are about to reshape.
How insurers are treating the economic environment with respect to property
Property insurers in Australia are constantly recalibrating their exposure based on macro signals. Construction cost inflation, labour market tightness, interest rate movements, and shifts in development activity all feed directly into how underwriters assess replacement cost risk. This goes hand in hand with the setting of premium levels, capacity outlay, and determining the terms on which they are willing to offer cover.
When a Federal Budget introduces reforms that are likely to drive a sustained increase in construction activity (as the proposed negative gearing changes are expected to do) the insurance market responds, often before the broader property market has fully adjusted.
The proposed restriction of negative gearing to newly constructed homes from 1 July 2027 is likely to redirect a significant volume of investment capital toward new development. That shift will place additional pressure on an already strained construction sector, pushing up costs, extending project timelines, and intensifying competition for trades and materials. From an insurance perspective, this creates a compounding problem.
Replacement costs for existing properties rise in an environment of heightened construction demand, and the sums insured that property owners declared at their last renewal become increasingly disconnected from what it would actually cost to rebuild. Insurers are acutely aware of this dynamic, and it directly influences how they approach valuations, co-insurance clauses, and claims assessments.
The valuation gap and what it costs property owners
The most significant insurance risk flowing from the current environment is underinsurance, and it is more widespread than most property portfolios may realise.
The gap between declared sum insured and true replacement cost has been widening steadily since 2021, driven by construction cost inflation, supply chain disruption, and a persistent shortage of skilled trades. That gap does not become visible until a claim is made, at which point its consequences can be severe.
Australian property insurance policies typically include co-insurance provisions that penalise the policyholder when the declared sum insured falls materially short of the actual replacement cost at the time of loss. In practice, this means that an owner who is underinsured by, 30 per cent may find that their insurer only responds to 70 per cent of a valid claim, even if the loss itself is far smaller than the total replacement cost. This is not a theoretical risk.
We have seen this occur with increasing frequency among clients whose valuations were set in a lower cost environment and have not been updated to reflect current conditions. The financial exposure at claim time can be significant, and the outcome is rarely one that clients anticipated when they took out the policy.
The challenge is compounded by the fact that many property owners conflate market value with replacement cost. These are fundamentally different figures, and in the current environment they can diverge considerably.
‘Market value’ reflects what a willing buyer would pay for an asset, incorporating land value, location, and comparable sales, whilst ‘replacement cost’ reflects what it would actually cost to demolish and rebuild the structure to the same standard using current materials, labour, and compliance requirements. Insurers are interested in the latter, and it is the latter that should drive the declared sum insured.
For property owners who have not commissioned an independent replacement cost valuation recently, there is a real risk that their cover is based on a figure that no longer has a meaningful relationship to the actual exposure.
Rising costs, extended recovery periods, and business interruption exposure
For property owners who carry business interruption or rent loss cover alongside their property insurance, the current environment introduces a further layer of risk that deserves careful attention. Business interruption cover is structured around an indemnity period (which is the length of time for which the insurer will respond) to lost revenue or rental income following a covered loss. That indemnity period is set at the time the policy is written, based on an assumption about how long it would take to reinstate the property and resume normal operations.
In a construction environment characterised by labour shortages, extended lead times for materials, and increasing complexity in meeting current building code requirements, the indemnity periods that were considered adequate two or three years ago may now fall well short of reality. A commercial property that might previously have been rebuilt within 18 months could realistically take 24 to 30 months in the current environment, particularly if specialist trades or materials are involved. Where the declared indemnity period does not reflect this reality, the property owner carries the uninsured revenue or rental loss for the period beyond what the policy covers. This exposure is rarely modelled explicitly by clients, and it represents one of the more underappreciated gaps in the current market.
What insurers are expecting moving forward
Australian insurers are increasingly attentive to the quality of information they receive from commercial and investment property owners at the time of placement or renewal. In a market where replacement costs are moving quickly and the consequences of underinsurance are well understood, underwriters expect and in many cases require that declared sums insured are supported by current, independent valuations based on replacement cost methodology. Where that evidence is not forthcoming, insurers may apply their own assumptions, which are not always favourable to the insured
For property owners, the practical implication is that the discipline of maintaining current valuations is no longer simply a matter of good practice. It is increasingly a condition of obtaining adequate cover on commercially reasonable terms. Owners who can demonstrate that their sums insured are based on recent, professionally prepared replacement cost assessments are better placed in negotiations with insurers and will be better protected in the event of a claim. Those who cannot demonstrate this are exposed.
The broader picture
The reforms contained in the 2025–26 Budget will play out over several years, and their full insurance implications will become clearer as construction activity responds to the negative gearing changes and as asset restructuring accelerates under the new CGT and trust settings. What is already clear, however, is that the property insurance market is operating in an environment of genuine and sustained upward pressure on replacement costs, and that the gap between declared sums insured and actual exposure is widening for a material proportion of Australian property owners
Replacement cost valuations should be current, indemnity periods should reflect the actual rebuild environment, and any ownership restructure should trigger an immediate review of the insurance program. The insurers who write this risk are already factoring these dynamics into their assessments. The property owners who understand this and act accordingly will be considerably better positioned.
