Softening Pacific Commercial Rates Mask Heightened Underinsurance Risks

Commercial insurance rates across the Pacific region plummeted by 12% in the first quarter of 2026, delivering the most favorable renewal conditions for policyholders in recent years. However, insurance broker Marsh warns that declining premium costs are obscuring a widening underinsurance gap, as asset replacement and rebuild valuations continue to outpace market adjustments.

Macroeconomic Pressures and Escalating Rebuild Costs

While premium rates have softened, underlying economic inflation remains persistent across key markets:

• Australia: Consumer Price Index (CPI) inflation stood at 4.6% in the year to March 2026 before moderating to 4.0% in May. Meanwhile, the Reserve Bank of Australia’s core inflation benchmark—the trimmed mean—rose unexpectedly to 3.6%.

• New Zealand: CPI inflation hovered at 3.1% through March 2026, exceeding the central bank’s target range.

• Construction Inflation: Rebuilding costs in the construction sector are projected to surge by 6% by mid-2026, fueled by persistent labor shortages, supply chain bottlenecks, and material price hikes.

Specific material categories are seeing acute price pressure. Plastic piping products have spiked up to 36%, with steady cost increases reported for cement, concrete, sand, copper, and electrical componentry. Furthermore, global freight and energy costs remain elevated due to Middle East shipping disruptions via the Strait of Hormuz—impacting an industry where over 75% of heavy machinery depends on diesel fuel.

Indemnity Shortfalls and the Impact of the “Average Clause”

Beyond physical asset undervaluation, legacy business interruption (BI) indemnity periods—often established two to three years ago—are increasingly failing to account for modern, extended repair and supply chain delays.

• Illustrative Impact: If a property insured for $10 million sustains $5 million in damage, but its actual replacement cost is determined to be $20 million, the asset is 50% underinsured. Consequently, the insurer’s payout would be halved to $2.5 million, leaving the business to absorb the remaining liability.

To counter these structural exposures, risk managers recommend that organizations execute certified asset valuations every two to three years while conducting annual reviews of their business interruption indemnity windows.