Aust post lost the click and send parcel I sent. What should I do now?

[bm5678]

I recently posted an item using click and send and it has gone missing

Aust post have investigated and say it is lost and are refunding the postage fee but wont refund the buyer the value as I didn't pay for insurance

It was paid via paypal

Now the items value is only $10 so I am not overly worried about refunding it but would like to know what correct process should be - particularly if I have the situation again

What does paypal seller insurance cover. If the buyer starts a dispute would they get paid a full refund by paypal or does paypal say item was sent so they have to claim it with Aust post?

How does it all work. Any advice would be appreciated. I don't want to risk bad feedback over $10 so I would refund it if it comes down to that but also feel that I did everyhing correctly so why should I be unpaid for an item sent. 

[digital*ghost]

It's actually pretty rare for PayPal to issue a discretionary refund to a buyer for an INR if the seller has proof of postage, it's now in their T&C's that a buyer is ineligible for Buyer Protection if the seller can prove postage.