What is underinsurance and is your business at risk of it?

Last updated on 21 October 2025

Have you taken out business insurance? That’s excellent news – but it’s not the end of the story. If you take out cover but forget to reassess it regularly, you could be at risk of underinsurance: a scenario where you’re technically insured but will discover shortfalls if you need to claim. Here’s a look at the pitfalls of underinsurance for anyone who owns or runs a small-to-medium business and what you can do to avoid them.

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Underinsurance: (noun) Insurance where the sum insured is less than the full value at risk and would not be adequate to meet a total loss.

The dictionary definition of underinsurance may seem simple, but the scenario that arises can be anything but. When your small-to-medium business is underinsured, you’re at risk of a situation where your insurance payout isn’t enough to cover the costs you face. That can lead to some serious issues down the track – issues that can threaten your cashflow and even solvency.

The good news is knowledge is power. Here are some signs your business may be underinsured – and most importantly, what you can do about it.

Sign 1: Your business has been established for a while and you haven’t reassessed your insurance in the last 12 months

“It’s common to treat business insurance as a ‘set and forget’ obligation. But this approach puts you at risk of underinsurance, because as the circumstances surrounding your business change, so too will your insurance needs – and not necessarily in a predictable way,” explains Helmut Eberl, Senior Product Manager Commercial Packages, Allianz Australia.

High inflation, as we’ve seen recently, can cause replacement costs for buildings, equipment and vehicles to increase above the rate of CPI indexation.

Other influences can include new building regulations, for example, in construction in bushfire zones, that require rebuilds to adhere to a higher, and more expensive, standard. In other cases, changing regulations around dangerous materials, like asbestos, can increase the cost of clean-up or demolition after building damage.

If you haven’t assessed your insurance cover recently, make doing so a top priority.

Speak to an insurance professional who can help you update your risk assessment and give you assurance that your cover is adequate.

Helmut Eberl,

Senior Product Manager Commercial Packages

Sign 2: You’ve estimated how much cover you need based on what you can afford or how ‘low frequency’ you consider an event to be

In some cases, even without high inflation or changing circumstances, your cover may have been inadequate in the first place.

Helmut says, “It can be common for new small businesses to take out the minimum necessary insurance to maximise cashflow when starting out – an understandable, but risky approach.” In this instance it’s worth considering the use of a premium funding product. By giving you the flexibility to pay your insurance premiums in regular instalments, it helps you manage cash flow.

Other common pitfalls include disregarding insurance for events you think are not likely to happen. Helmut explains, “Letting go of insurance for low frequency events, for example, flood insurance, can be a bad decision that a surprisingly high number of people make in practice. Not having ever had a claim they question – do I really need this?’’

Another area to watch out for is underestimating your needs based on asset values, rather than true replacement cost. If you’re unclear about the difference, it’s best to speak to an expert.

Speak to an insurance professional who can help you navigate these questions, and give you confidence that you’ve got enough cover, without compromising your cashflow.

Sign 3: You’ve recently improved your premises or equipment, or your business has grown

Business, by its nature, is changeable. Small businesses grow into medium ones, technology develops, and processes evolve.

As these changes occur, it’s vital to reassess whether your insurance cover is adequate. For example, as businesses move to electric vehicles (EVs), relocate or expand into new locations, or invest in equipment, new risk considerations may come into play.

Unsure where you sit? Reach out to speak with your insurance professional.

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Disclaimer

This article has been prepared by Allianz Australia Insurance Limited ABN 15 000 122 850 AFSL234708 ("Allianz"). In some cases, information has been provided to us by third parties and while that information is believed to be accurate and reliable, its accuracy is not guaranteed in any way.

Any opinions expressed constitute our views at the time of issue and are subject to change. Neither Allianz, nor its employees or directors give any warranty of accuracy or accept responsibility for any loss or liability incurred by you in respect of any error, omission or misrepresentation in this article.

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