With inflation and interest rates rising, many Australian SMEs are looking at where they can cut costs. However, when it comes to insurance, they should tread carefully.
There are benefits in shopping around for a better insurance deal, but being underinsured is fraught with danger.
Underinsurance happens when the sum you are insured for isn’t enough to cover the full cost of replacing what is lost or damaged or to restore your business operations to the previous standards.
It often happens when businesses haven’t properly calculated the current replacement value of their property, stock, equipment, vehicles and so on – or when they do not update their cover after upgrades or making new additions.
It could also result from overlooking the extra expenses in restoring, say, a property – for example, for removing debris, tip fees, council and architectural costs, clearing and transporting any damaged stock or potential rent if you have to operate elsewhere in the meantime.
In addition, underinsurance can happen when businesses have taken out less cover than they needed to save on premiums or because they can’t afford them.
Increased building costs because of updated building codes, building on difficult sites or rising labour and materials expenses may also play a part.
So might hardening conditions in the insurance market where insurers may want to up their premiums or reduce their exposures to SMEs or certain areas prone to fires or floods. Or they may need to increase premium prices because of pressures in the global reinsurance market.
Plus, too often, people think bad things just won’t happen to them even though we regularly hear about insurable events such as cyberattacks, business interruptions, worker injuries, weather events and other accidents.
Underinsurance means that if something unexpected happens, the business will have to finance the gap in cover itself.
Yet only 43% of SMEs polled for Vero’s SME Insurance Index 2022 believed they were fully covered from insurable business risks. Notable gaps in coverage were for risks such as cyberattacks, the inability to trade and machinery breakdown. Almost half worried about loss or damage to goods in transit but lacked cover for this.
Similarly, 62% of SMEs taking part in an earlier QBE poll admitted they were unlikely to have the insurance in place to fully protect their business.
Indeed, statistics from the Insurance Council of Australia reveal that 12.8% of small businesses and 24% of sole traders have no insurance.
Avoiding underinsurance
Given the dangers, here are some tips on how to ensure you are not uninsured:
- Enlighten yourself. Read the product disclosure statements cautiously and understand what your policy does and doesn’t cover. Call your insurer or broker if you are unsure about any of the details.
- Calculate the cost of replacing, repairing or rebuilding your business’ assets with the help of your insurance broker or by using a building insurance calculator and a contents insurance calculator.
- Consider bringing in a valuer to help you with the calculations.
- Note that valuations can change as the market changes or because of fast-rising inflation, supply chain issues and shortages of skills.
- Remember that your assets may be depreciated for accounting purposes and the costs of replacing them are likely to be higher than book value.
- Focus on all the costs that could be incurred in getting your business back on its feet and not just the main items such as building and contents, stock and plant.
- If your business is growing and your premises, manufacturing and customer bases are expanding, ensure that these increased exposures to risk are accounted for.
The costs of some lines of insurance are getting more expensive, but you don’t want to be left without adequate cover if something happens. Give us a call to consider different options for financing your rising insurance costs.