The riskiest business of all

Total destruction: underinsurance can lead to the total destruction of a company

Insurance for years has been viewed as a necessary evil – a forced purchase that in effect calculates the odds of failure or catastrophe. The severe consequences of underinsurance or non-insurance make it one of the most important risk-management measures that a business can take.

Finding the right cover at the right price is crucial – yet it is a step many businesses still fail to take. Up to half of all businesses are inadequately covered for business interruption cover, insurance broker Aon says.

Victoria’s Black Saturday bushfires in 2009 not only caused the deaths of 173 people – they revealed the gravity of Australia’s non and underinsurance problem. The Insurance Council of Australia says that its members received more than 10,000 claims with an approximate insurance value of $1.1 billion for that disaster. However, many businesses and individuals were under or non-insured, leaving them exposed in every respect.

For businesses, particularly in the worst affected areas such as Marysville, Black Saturday not only destroyed their physical assets, but cut off their income for an extended period.

Underinsurance is not a new problem. A 2008 survey by Woolcott Research found that more than a quarter of small and medium enterprises did not have any form of general insurance. Sole traders were the worst offenders, with up to 40 per cent operating their business without cover. And despite the high incidence of underinsurance, 94 per cent believed they were already adequately covered. Of the surveyed businesses that were underinsured, 80 per cent said cost was the main reason.

“Many businesses just don’t realise what their true risk exposure is, and it has been a problem for many years,” says Paul Venning, Aon national general manager, corporate risk services.

“That is why it is so important to get the advice of a broker and re-evaluate risk-management plans every year.”

Venning says insurance cover should be the final step taken in any risk-management plan. Companies must first determine their exposure to risk, then take steps against as many risks as possible. Any remaining risk is what companies should seek to insure against.

“You need professional advice to help to identify both the exposure and the risk that may cause a loss,” Venning says.

“A business interruption policy is very much a bespoke activity where an off-the-shelf solution is generally not the best one. The time and expense needed to review those exposures and design the right cover is going to pay itself off in the event that you have a loss.”

Activated Group managing director Dane Cornish says paying more than $40,000 in insurance premiums for his gymnastics and dance business has already paid dividends. The business, which is based in Wollongong in New South Wales and runs school gymnastics and dance programs throughout Australia, had one of its 35 trailers, complete with equipment, stolen last December.

As the trailer was new and unbranded, the thieves most likely thought they were getting a trailer stocked with tools. Instead, they got gym mats and skipping ropes, Cornish says. In any case, the theft of both the trailer and the equipment – which were insured under two policies – was covered without a problem.

“Although the claim was handled quickly by both insurance companies, the time it takes to have another trailer built and equipment delivered would have meant we would have had to cancel scheduled programs,” Cornish says.

“Luckily we had a spare trailer and the programs could run.”

While Activated has fleet, equipment, public liability, workers’ compensation, property and professional indemnity cover, Cornish says he cannot justify the cost of business interruption cover. Instead, the company has chosen to have a spare trailer available at all times.

The company is required to have at least $10 million worth of coverage under its liability policy for working with children, Cornish says. Its specialised sporting club insurance broker recommends doubling that to $20 million.

“It is required under the (New South Wales) Department of Education and that level of cover was at around $5 million five years ago,” Cornish says.

“Our workers’ compensation is another matter altogether. Because we are operating across Australia we are required to have eight different policies across the states. It is a huge amount of paperwork for a small business and we could not handle it without a broker.”

Cost is always an important factor for businesses when buying insurance, however it should never be the most important aspect, Aon’s Venning says. “The breadth of cover is more important. There is no point in paying not much money if you’re not getting any coverage.”

Over the past six to 12 months commercial insurance premiums have generally stabilised, he says. Most businesses with relatively stable claims histories will have their premiums unchanged, Venning says. Premium rates for key classes of insurance cover such as directors and officers and product and public liability will remain relatively stable this year, he predicts. For more contentious areas, such as directors and officers cover for financial advisers, businesses may experience increases.

“The public and product liability market is competitive, however it is probably flattening off now,” he says. “We expect to see a price change in the next couple of years as reserve releases from the prior years are consumed.

“There was a bit of a feeding frenzy in the professional indemnity market after HIH collapsed in 2001 but we will see some levelling-out in that market.”

Former heavyweight HIH Insurance dominated the professional market, underwriting about 60 per cent of all policies prior to its $5.3 billion collapse in 2001. As a result of the market shrinkage, professional indemnity premiums became unaffordable for many businesses. A flood of new market entrants in recent years has pushed premiums down. A readjustment or stabilisation of premium rates is occurring.

A 2009 general insurance survey by JPMorgan and Deloitte reported that strained insurance profits, resulting from the impact of the global financial crisis and a greater number of claims, had pushed business insurance premiums up about 4 per cent and personal insurance premiums up 8 per cent.

“Premium rates in 2009 increased in almost all classes, except workers compensation, because of the profit collapse,” Elaine Collins, Deloitte actuarial partner and joint co-ordinator of the survey, says. “The increases in commercial classes (business cover) were more moderate with the greatest increases at the small and medium enterprises end.”

When it comes to buying insurance, Australian underwriters are a relatively safe bet. All insurers are governed by the Australian Prudential Regulation Authority and insurance intermediaries, such as agents and brokers, are required to hold Australian financial services licences to conduct businesses.

Some Australian insurers provide a limited range of business cover through their websites, but more than 90 per cent of commercial insurance is arranged by brokers. Personal insurance such as motor vehicle and home and contents cover is sold mostly through insurer websites.

Brokers generally act independently from the underwriters. Businesses are the brokers’ clients, and they approach underwriters for quotes on different types of cover, depending on the needs of the client. Underwriting agencies, which conduct most of their business through brokers, have access to niche markets overseas for risks which are hard to place or specialised.

BRW

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