Underinsurance is chronic in Australia. It’s everywhere, from home owners to small businesses.
Consider this: when the Victorian Black Saturday bushfires destroyed more than 2000 homes in 2009, about 13 per cent of all property losses were not insured. In the Black Saturday fires in New South Wales in 2009, insurance covered only 43 per cent of the damage. When bushfires destroyed or severely damaged 500 homes in Canberra in 2003, estimates for national rates of underinsurance ranged from 27 per cent to 81 per cent. Only 66 per cent of the damage was insured after Cyclone Larry in 2006 and the insurance covered $1.7 billion of the $2.2 billion in losses after the 1999 Sydney hail storms. And that was in Australia’s wealthiest city.
But it’s an even more alarming problem for small businesses because it threatens the survival of SMEs when they are making an insurance claim if the full recovery of the losses cannot be achieved.
It is estimated that 70 to 80 per cent of businesses are underinsured.
According to ABS Small Business Surveys in 2001 and 2004, just under 200,000 uninsured small businesses were operating in Australia. There are now expected to be many more.
A 2005 analysis by the Australian Securities and Investments Commission found that one in six SMEs had failed to insure their properties. And of those that were insured, the amount was significantly under replacement value.
Cameron Research in 2006 found that 13 per cent of businesses did not have fire insurance, 65 per cent did not have business interruption insurance and 18 per cent did not have burglary insurance.
And the trend has continued. According to research from Swiss Re in 2016, Australian businesses are more underinsured compared with their US and UK counterparts. Swiss Re says property risk is a big area of underinsurance, estimating total annual uninsured losses of $4.49 billion.
And a recent survey by the Insurance Council of Australia found 26 per cent of businesses have no form of general insurance. The most uninsured are sole traders with 40 per cent of them operating with no coverage.
ICA research also found that while 81 per cent of SMEs admitted that an unforeseen business disruption would have a severe impact on their business, only 27 per cent had taken out Business Interruption insurance.
So what to do?
The reality is the financial regulator ASIC and industry bodies such as the ICA have run campaigns to educate SMEs on being properly insured. But all that effort has not had enough impact on the levels of SME business insurance across Australia.
Some of the problem comes down to business owners not being completely across the policy document.
For example, some businesses try to save on their premium costs by insuring only a percentage of the replacement value. That’s short sighted because they are only taking a percentage of the risk. A fire, an electrical fault or a natural disaster such as a storm or cyclone would lead to significant costs and months of rebuilding, which would be way over the replacement the business has been insured for.
Some businesses also fail to update their policies when the business is growing, expanding the premises, buying new equipment or diversifying the product range.
So when disaster strikes and the business has to make a claim, the sum insured no longer reflects the true replacement value. Insurance policies need to change and grow with the business.
The other big mistake is insuring only for the assets on the balance sheet when the replacement value also has to take into account stock, equipment and cost to rebuild, leaving the business underinsured.
The main reasons for underinsurance need to be resolved, especially when the survival of so many small businesses might be at stake. For only a few dollars on their monthly premium, businesses would be protected.
One of the reasons for business underinsurance might be what business perceives to be the high cost of insurance premiums. But on close analysis, small business spending on insurance would represent less than 1 per cent of their total outgoings when compared to costs such as rent, electricity and wages.