Australia’s two million small-to-medium enterprises (SMEs) comprise more than 95% of all businesses in the country and employ nearly five million people, or 70% of the local workforce.
With most business surveys suggesting SME trading conditions and confidence have remained somewhat tender since 2009, underinsurance remains endemic and may
be a shared failing among up to four out of five SMEs.
Insurers are increasingly offering more flexible and specialised packages for their SME clients, where brokers can choose from a standard list of up to 12 covers and insure against additional risks specific to an industry, size of business or profession, until a package – effectively bespoke and calibrated for that client – is constructed.
As the name implies, QBE’s Business Pack policies package cover for the main property and liability exposures faced by SMEs into the one document, says QBE National Product Manager Andrew Norris.
“The main sections within a typical business insurance policy include Property, Business Interruption, Public and Product Liability, Theft, Money, Glass, Machinery Breakdown, Electronic Equipment Breakdown, General Property, Employee Dishonesty and Transit,” he says.
“Depending on the packaging, some companies may also include Commercial Motor and Personal Accident cover.
“Additional covers packaged may include Tax Audit, Legal Expense Cover, Management Liability, Employment Practices, Statutory Liability and Professional Indemnity.”
James Makin, Head of SME Portfolio Management at Zurich, says material damage to property can include that from fire or extreme weather events and malicious damage such as vandalism. He points out that ‘tools of trade’ and Commercial Motor can be streamlined into one package, and their fully automated interface allows brokers to select the relevant risks. Business Travel also forms part of the platform, and Management Liability is expected to join the fold soon.
Risks that fall outside the coverage limits of an insurer’s reinsurance treaties are excluded from business insurance packages, says Norris.
Of 121 insurers licensed to conduct general insurance business, only 12 were reinsurers as at 31 March, so most policies tend to share the same exclusions, such as War, Terrorism, Radioactivity and Asbestos.
“Perhaps the most topical peril exclusion applied by many insurance companies is Flood risk cover,” Norris says.
“This may be available as an optional cover if the flood risk for the location has been mapped and the exposure can be quantified.”
Makin says Professional Indemnity is usually sold as a separate risk and Compulsory Third Party is often excluded, as are Workers Compensation and the Cargo Marine classes of business.
Premiums and mitigation
“Insurance premiums are impacted by loss trends, including natural catastrophes on the property components, such as frequency and average cost, as well as reinsurance costs and interest rates earned on money invested to pay for claims,” says Tony MacRae, Executive General Manager, Intermediary Distribution, QBE Australia.
“As costs increase, insurers have to become more granular in their pricing. This means that some risk profiles may experience a significant increase when negative risk factors compound.
“To help with mitigation, brokers should promote the importance of risk management and assist customers to identify and, as much as possible, reduce or eliminate risks faced by the business. This is good for their business as much as it is a way to control insurance costs.”
Makin says floods have buoyed premiums but also increased public awareness of flood risk.
However, Business Interruption is a classic example of a cover whose take-up rate will fall when businesses feel the pinch.
“SMEs feel economic trends more acutely than other sectors and have increased pressure to underinsure to reduce costs,” Makin says.
“Only about half of companies have Business Interruption cover, because is not well understood. Most think of insuring against damage to physical property but not the subsequent loss of income from stalled trade.”
Taking care of business
MacRae outlines five ways brokers can gain a competitive advantage:
- Build an understanding of the usual risks associated with the customer’s industry.
- Analyse their business operations to identify all risks that require insurance.
- Offer risk management advice to reduce or eliminate risks.
- Focus on selling the benefits of important covers often neglected.
- Explain when it isn’t commercially viable to use insurance as a risk transfer mechanism, e.g. when covering small and recurring loss events.
Makin says the best way brokers can get ahead is to provide advice on underinsurance.
“As Gen Y become SME owners, there would be an increased desire from them to go direct first, so a broker’s position has become analogous to an accountant regarding tax returns; although anyone can lodge one, an accountant would less likely miss a detail,” he says. “But whereas an accountant can save you some money, a broker can save your business.
“To ensure that brokers continue to play their vital role as respected advisers, perhaps they have to learn search engine optimisation and embrace technology to attract and keep tomorrow’s clients,” Makin says.
Case Study One
Product Liability and Crisis Management insurance are important for any manufacturing businesses.
In China, two companies recalled their products citing high amounts of aflatoxin, a carcinogen produced by fungus in cows’ feed. A third company issued a recall after “unusually high” levels of mercury were allegedly found in their product. There have also been recent incidents involving recalls of contaminated New Zealand export milk powders.
These are perfect examples where a public relations consultancy component of a Contaminated Products insurance policy could assist a company with minimising reputational damage in a product recall situation.
The sequence of events has tainted the Asian baby formula industry, with some families steering clear of locally made formula products and instead relying on overseas contacts to send them formula.
The repercussions have also extended to Australia, with retailers placing a limit on the number of formula tins bought by customers per day.
Andrew Spurr, Liabilities Manager, AIG Australia
Case Study Two
Fire in store
An extensive fire raged through a Sydney automotive accessories store, destroying its entire stock and severely damaging the building and shop fit-out.
Furthermore, during the clean-up process, asbestos was discovered, which necessitated intervention by the Environmental Protection Agency and further prolonged the timeframe to return to trading.
This sudden, dramatic and unexpected interruption to normal business was absolute; revenue ground to a complete halt. Meanwhile, of course, the expenses faced by the enterprise continued unabated, with wages and rent to pay and utility bills and suppliers’ invoices mounting.
Fortunately, the owner had the foresight to take out a business interruption policy some time earlier although, like so many SME owners, he had never imagined they would actually use this cover.
Despite facing a growing list of expenses from running costs, the owner’s mind was put at ease when his business interruption policy was activated to pay outgoings. Further payments helped finance the purchase of replacement stock.
The insurance policy continued to cover the loss of profits of the business while the business was unable to trade.
GIO Business Knowledge Centre Edition 8
Case Study Three
Supermarket stays afloat
When the Foodworks supermarket in Laidley was hit by the floods that devastated Queensland’s Lockyer Valley in 2011, owners Noelene and Graeme Diamond found out the hard way about the vagaries of policy wording when it turned out they had storm, not flood, cover with a general insurer.
They sought a new insurance policy through a new broker, Jeff Stevens of Austbrokers HCI in Toowoomba, and were struggling right up to the Christmas of 2011 to get back where they were.
Just as they thought it was all behind them, worse floods inundated the same area in January this year. The water was higher, the mud was thicker and deeper and the devastation to their shop was complete. This time the emotional impact was even greater and they were at breaking point until their broker advised they were covered for flood under their business insurance package.
Business interruption cover also proved critical to keep paying staff and tradespeople.
An onsite assessment by Zurich within 48 hours of the event triggered a six-figure advance so they could get prompt help to clear out mud and rebuild their business. Within two weeks, they were open for business while many neighbouring shops remained closed, unsure whether or when they would reopen.
Zurich Foodworks claims testimonial