What's driving insurance to new heights?

Insurance costs are rising at their fastest pace in more than two decades, according to the Australian Bureau of Statistics.

Data from the ABS's December quarter report showed that while overall inflation moderated, with the Consumer Price Index at 4.1 per cent year-on-year, general insurance costs rocketed up 16.2 per cent. This was the largest annual jump since March 2001.

That price spike is being felt across both private and business sectors, with the Australian Competition and Consumer Commission's most recent Insurance Monitoring report finding that from 2021/22 to 2022/23, business insurance premiums across various Australian regions rose an average of 15-22 per cent for SMEs with less than $5 million insured. The highest increases were in Western Australia's north and the Northern Territory.

Individually, some businesses, particularly in the entertainment, accommodation and leisure industry, have reported much larger leaps in the cost of mandatory public liability cover.

Owner of The Old Bar in Melbourne's Fitzroy, Liam Matthews, told The Age in January his public liability insurance had jumped from $10,000 a year to $60,000 in the past two years, despite the venue never having made a claim. And Perth live music venue Badlands closed its doors in December last year, citing a ten-fold increase in the cost of public liability insurance despite, also, never having made a claim.

In January, Australian Small Business and Family Enterprise Ombudsman Bruce Billson pleaded for urgent and decisive action from insurers to help businesses understand how risk was being assessed and could be mitigated.

"Live entertainment and music venues have been heavily affected by the lack of suitable insurance cover to continue what they have been doing for decades. While small professional services firms face skyrocketing insurance costs despite making no claims," he wrote.

"Unlike households who, for many reasons, might choose to be uninsured or under-insured … a small business must have insurance covering areas such as public liability."

Why are premiums jumping?

According to the Insurance Council of Australia, the major factors driving premium rises are:

• The prevalence and risk of extreme weather events, from cyclones to bushfires.
• Skills shortages and supply constraints increasing claim costs.
• A shift in the insurance cycle towards conditions, with rising costs and claims due to factors including increasing litigation; more extreme weather events and rising building costs . In a hard market, it is also difficult for insurers to get reinsurance (insurance for insurance companies), so companies look to reduce their exposure to risk. Professional indemnity, public liability and business interruption cover have been identified by the Insurance Council of Australia (ICA) as particularly impacted by premium rises.

What can businesses do?

While business peak bodies, government and regulators grapple with how to address recent sharp rises there are some things SMEs can do to try to keep premiums down.

1. Prepare and budget early for renewal

Rising insurance costs don't show any signs of abating, with the most recent ABS data from February showing general insurance inflation still climbing at 16.5 per cent year on year.

Forewarned is forearmed and businesses should set alerts a few months out from their annual insurance renewal date to allow time to review their business needs/risks and get quotes from other insurers. Have data and evidence about your individual and industry risk profile ready to go.

Take note of inflation data and factor a premium increase into business budget forecasts.

 2. Minimise risk

Taking steps to reduce identified business risks, particularly in relation to public liability, workplace injury or professional indemnity, may help reduce premiums. The Insurance Council of Australia's Business Advisory Committee concluded lack of risk mitigation, rather than market failure, has been driving affordability issues in the leisure, caravan park and out-of-home community care sectors.

Similarly, ICA CEO Andrew Hall has said in the live music sector, things such as security staff and cameras could help demonstrate a venue is well run in relation to liability risk. At Melbourne's The Old Bar, venue management recently put up signs that read No dancing whilst drinking to mitigate slip risks and comply with new terms in its liability insurance.

The Federal Government's business.gov.au site has advice and checklists to help businesses identify and assess business risks, along with guidelines on developing policies and procedures to minimise it.

Ask your insurer what steps you can take to reduce your risk as they see it. 

3. Beware of over-insurance

While under-insurance is more often discussed, over-insurance can also be an issue.

One of the basic principles of insurance law is that you cannot profit from a loss. So, if you own your business premises and it is destroyed, you can only receive up to the amount the insurance company believes it will cost to rebuild, regardless of whether you were paying for more coverage. Many insurers automatically increase the insured amount of buildings by around 5 per cent each year to allow for inflation, but this rising valuation can quickly add to premiums. Update building valuations every couple of years to ensure you're not paying for more insurance than you need. Also, keep an eye on whether any depreciating assets may allow you to reduce your contents insurance. 

4. Bundle

Bundling policies with one insurer can yield discounts but check these are properly applied and look for overlaps in policies that may mean you're paying for the same coverage twice. 

5. Speak up

Advocates, such as the office of the Australian Small Business and Family Enterprise Ombudsman, are lobbying the Government and insurance industry to negotiate more with businesses over risk and how it can be reduced to keep premiums manageable. Businesses that experience significant insurance hikes without any change in operation can contact industry groups to share their experiences.

The information provided in this article is specific to the particular situation described and individual experiences and results may vary. Past performance is not an indication of future performance and no representation or warranty is made that the information contained above is appropriate for any particular circumstances or indicates that a particular course of action should be followed. 

Please note your broker and Australian Finance Group Ltd does not provide financial product, tax, legal, or accounting advice. Any information contained in this document is of a general nature only and does not take into account the objectives, financial situation or need of any particular person and is not intended to provide, and should not be relied on for financial product, tax, legal or accounting advice. Therefore, before making any decision, you should consider the information with regard to those matters and consult your own financial product, tax, legal and accounting advisors before engaging in or considering the appropriateness of any transaction. The information provided above is specific to the particular situation described and individual experiences and results may vary. Past performance is not an indication of future performance and no representation or warranty is made that the information contained above is appropriate for any particular circumstances or indicates that a particular course of action should be followed.

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