Underinsurance is rife across Australia, with 80% of businesses thought to be underinsured by at least 10%. Insurance & Risk Professional puts the issue under the microscope, and assesses the potential for brokers.
The recent spate of natural disasters has thrown fresh light on the issue of underinsurance for businesses, with industry sources estimating up to 80% of businesses are at least 10% underinsured.But is this an opportunity for insurance brokers or are businesses simply not prepared to pay the cost of properly insuring their assets? It was an issue that Andrew Nock, Proprietor of Andrew Nock Valuers, spoke about at the Steadfast Convention, and speaking with Insurance & Risk Professional after the event, he says that, in his estimation, up to 70% of businesses are not insured or not fully insured, although this figure could be as high as 80% and it’s been this way for many years.According to a study his firm undertook, based on 18 recently completed building insurance valuations, the post-valuation total was $212,370,000 compared to the pre-valuation total of $125,810,000. That represents underinsurance of $86,560,000 – or a 69% deficit. The study looked at all types of buildings and locations, with the biggest underinsurance of a building being a 567% deficit and the lowest a deficit of 23%. Jeremy Kendall, National Marketing Manager of Propell National Valuers, says it’s hard to estimate the extent of the underinsurance problem for small businesses. However, he says, “From our experience, of the valuations we have performed for insurance purposes, almost 90% of businesses have been more than 30% underinsured.”In terms of business assets that are not properly insured, Kendall says, “Evidence suggests that plant and equipment is as underinsured as buildings, although buildings are often better covered predominantly due to their size and because they are seen as more important than other assets.”Shane Doyle, Chief Executive Officer of Zurich Australia Insurance, says many businesses are underinsured for stock and equipment and also for business interruption. “We saw a lot of this after the recent floods,” he says. “Even when businesses did have cover they were often not adequately insured.”
Sector-specific problems
Paul Giles, General Manager Communications, Insurance Council of Australia, says the underinsurance problem varies from sector to sector. “In agriculture you often find assets like tractors and combine harvesters are not properly insured because of their high cost and because they remain on the farm. In retail, you find stock is often not properly insured, which is also usually a decision around cost, although behavioural factors, such as previous experience with insurance and the attitude that ‘it won’t happen to me’, also come into it. ”Another key reason for widespread underinsurance is that business owners don’t accurately value their assets for insurance purposes. Kendall says, “Business owners sometimes don’t realise the effect factors such as steel prices, rates of exchange and changes to local council building codes have on the value of their business. ”Another issue is the hidden costs that are incurred after a loss. These can include access difficulties, heritage issues, lead times for demolition, legal and professional fees, regional location, site conditions and zoning restrictions, which can have a huge impact on the costs and are factors of which building owners are often unaware. Another problem for brokers is difficulty in determining what comprises building services compared to what comprises plant and equipment and contents of a building.
Comparing like-for-like?
A growing problem, says Nock, is the emergence of cheaper, low-quality manufacturing equipment from China in terms of valuing machinery for insurance purposes. “Say if you’re valuing a knitting machine, you might have a high-quality Japanese machine worth $130,000 and on the other hand a lower- quality Chinese-made machine that costs $36,000 providing the same function. So how does the valuer determine the correct value? The cheaper machine might only last five years and the more expensive one 20 years, but the same amount of money could be used to buy three or four of the cheaper machines.This type of issue has to be clarified with the client before a valuation can be determined. ”Nock also warns against relying on building cost calculators now readily found on the internet. He warns they must be used as a rough guide only and should not be relied on absolutely. Every building is different, not only in terms of size and building components, but also in location, zoning restrictions and access, to name a few factors that determine the correct cost of a building. As to why business owners are not adequately insuring their businesses, Nock says, “Clients are scared of the extra premium they will have to pay to be fully insured. Or they take the attitude that ‘it will never happen to me’.”He says a widespread problem is unwillingness among businesses to pay for valuations. “They just don’t want to spend money on having a valuation done,” he says, explaining that taking such an approach can be a big mistake. If, for example, a business has a building that is insured for $5m but, following a loss, the correct value of the building is found to be $10m, the business owner could be left severely out of pocket, simply because he was unwilling to pay the price of a valuation.
Reasons for underinsurance
According to Doyle, the high cost of premiums is a particular deterrent for businesses to get cover in states such as New South Wales, where up to 50% of the premium goes back to the government as tax. Kendall says, “There are myriad reasons why businesses are underinsured. Sometimes the business owner thinks the purchase price of an asset is the same as the reinstatement value, sometimes they think they know the true replacement value of an asset when they don’t and sometimes they assume last year’s declared values are still correct when they’re not. ”In terms of what underinsurance is costing the insurance industry, Nock says, “If our study showed a massive underinsurance deficit of 69%, think of what this represents for the industry in terms of lost premiums and income.”
Addressing the issue
So what can insurers and brokers do to address the problem of underinsurance among businesses?According to Doyle, many businesses just don’t understand what they need to be covered for. “However, if a business uses an insurance broker, it is more likely be properly covered than a business that doesn’t use a broker, so there’s a key role for brokers in helping to educate businesses about the different types of insurances they need. ”Nock says that while valuers and insurance brokers are trying their best to ensure valuations are carried out, it’s difficult for brokers because many clients are still prepared to carry the risk in the first place. “However, not only is the client at risk, so too is the broker. But the underinsurance problem is so severe that the insurance industry in general must address the situation. ”Kendall says most insurers and brokers are not valuers and are not really able to advise clients on their declared values. But insurers could take a more active role when considering values rather than simply adding an average or co-insurance clause to the general conditions included in an insurance contract. He says, “If the industry as a whole were to take a more stringent approach, we would see fewer problems when a business submits a claim.”
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