Business insurance: The Risk Gap – Is Kiwi business under-insured?

Risk is an inevitable part of business life and people totally averse to it will seldom be found leading or managing an enterprise of any size. But, as one insurer regularly points out, s…t happens, and research suggests as many as half the businesses that suffer an adverse insurable event in New Zealand are unable to survive it.
That is possibly because so few have adequate insurance cover. When brokers Crombie Lockwood commissioned report from loss adjusters McLarens over year ago to check out concerns about under-insurance, the news wasn’t great.
“The good news was that 98 percent of businesses do have insurance, but that didn’t mean much when it came to claim times – if you look at buildings, for instance, only 17 percent are insured adequately,” says Ross Williams, general manager New Zealand sales and development for Crombie Lockwood.
“In terms of plant, just 36 percent have the right insurance, and profit insurance is the worst of the lot – around 80 percent of businesses don’t have any ‘loss of profit’ cover at all.”
It can take some time for business to get back on its feet or rebuild following an adverse event – few factor in things like the time taken to acquire resource consents, says Williams. “People going into business tend to get it right at the start, but as the business grows it has significantly greater assets, its profits go up – but there’s often reluctance to increase premiums.”
It doesn’t help that right now purse strings are being pulled even tighter, or that insurance tends to be grudge purchase. After all, you only have something to show for your investment if your business does suffer major interruption – and why would it?
Brokers tread difficult path when it comes to trying to make sure their clients will survive any insurable event. At the moment lot of businesses are in survival mode and not too receptive to the idea of extending cover. The assumption is you’re just trying to push product, notes Paul Munton, general manager of Aon’s Auckland branch.
“There is more onus on brokers to make sure they are doing the right job in telling clients that this cover is available and trying to find fit where it is affordable. I think sometimes we let ourselves down as an industry by not being as insistent as we could be. There’s that balance between being pushy and making sure we’re doing the job properly.”
Munton says businesses are more receptive to the idea of insurance because banks increasingly require confirmation the cover is there, but there’s lot of education to be done on risk assessment – what can be lived with, what mitigated and what needs to be insured against.
“I think we can really contribute without selling anything in terms of risk management support. For too long I think the insurance industry has focused just on selling product, rather than partnering with the client to talk about exposure and how to better manage risk without paying more money.”
The insurance industry, of course, faces its own risks and the increasing frequency of extreme weather events has seen it getting clobbered in recent years. When once-in-50-years flood event starts turning into regular occurrence then the industry will either lift its premiums or stop coming to the party altogether. Insurance is an annual contract and the insurers can opt out, says Williams.
“Areas that are becoming flood prone won’t get cover – insurance consumers often don’t understand that, but that’s the way the industry operates. Even though insurers take on risks they are massively risk-averse organisations and what’s been happening is that weather events are becoming more frequent and more severe.
“While I’m no expert on this, I think some of the actuarial models the industry has created are quite threatened. There are very few insurers in the Australasian market who are making underwriting profit at the moment – for the first time in many years.”
Combine that with the recessionary hit taken on interest deposits and the reaction is hardening in the premium market.
“It’s been soft for several years, but I believe it’s going to harden reasonably sharply over the next couple of years,” says Williams.
Not that conversation on business insurance should focus on premiums – though that has tended to be the case, he adds.
“Insurance over the past six or seven years has been around ‘what premium deal can you get me?’ and that’s the last thing you should talk about. The conversation needs to be around what has changed in the business because risk is reasonably easy to work out if you ask the right questions.
“I don’t see it as product thing as such, but the skill set around asking the right questions, because then you can put package together to cover that business in customised manner so if an insurable event happens, it will financially survive. That’s our only job.”
Williams thinks the biggest issue for the industry at the moment is that clients just don’t know how under-insured they are.
“My personal view is that as an industry we shouldn’t be proud of that and we should be doing something about it. There’s no quick fix – it means sitting down with clients and doing the right job, really understanding their business and what they’re trying to achieve.
“I guess the other thing is that things are tough. I don’t think we’ve ever had recession and hardening insurance market at the same time so when you need more premium is the time when you have less money. That’s tough to sell in, but we are going to have to help our clients come up with ways to manage risk in their business.”

What to insure
Business assets – property, machinery, vehicle fleet etc
It’s fairly obvious start point and one banks are pretty keen on, but the trick is to keep re-valuing these assets on regular basis. Under-insurance is rife because premiums don’t maintain pace with business growth.

People assets
The old adage has it that people are company’s most valuable assets – but how many companies actually take that into account on their insurance cover? Businesses can protect themselves against the loss of key personnel or add personal cover to the remuneration packages of key personnel.

Basically insures against liability legally imposed on company because of the negligence of its actions or those of its employees. This can include general or public liability (for accidental damage or personal injury); employer liability (legal action, compensatory payments for injury etc); statutory liability (fines, penalties etc for breaching legislation); directors/officers liability; internet liability; professional indemnity; or crime.

Employee theft
Fidelity insurance provides cover from employee theft and is sometimes included in general business or liability packages. Some industries are more prone to this than others and there is some suggestion it becomes more of problem during tougher economic times.

Business interruption or loss-of-profit cover
Seems not many New Zealand businesses have it at all, let alone have enough of it – but insuring against loss or damage to cashflow or profit due to interruption of operation (whether through flood, fire, flu…) could be the difference between surviving business interruption or going under.

Health insurance
A useful and attractive add-on to employment remuneration packages.

This is by no means an exhaustive list and it’s best to talk to your insurance company or broker about the specific risks to your business. Most insurers offer packages that provide good off-the-shelf business protection cover or companies can go for tailor-made package that suits their specific needs. Most insurers also offer information on risk management – what steps can be taken to mitigate risk and reduce insurance premiums.

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