Insurance: The risky business of having peace of mind

Greg Thompson
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The changing landscape of insurance is challenging businesses’ approach to how they can achieve the right cover. Premiums continue to rise, there is a greater focus by insurers on linking the cost of coverage with risk, and the proliferation of major insurance events are stretching insurers’ resources.

Insurance premiums are no different than most business costs. But unlike most business expenses, there is potential for significant upwards movement in premiums. This year alone a number of businesses I have spoken to have seen premiums increase more than double the rate of inflation. This was before the floods affecting the upper North Island, and the devastation of cyclone Gabrielle. With inflation sitting above 7% and projections it will take some time to get under control, increasing insurance premiums should prompt all business owners to review the level and extent of insurance cover for their organisations.   

Which risks are actually covered?

While most businesses focus on the cost of what they currently have insured, few have undertaken the exercise of understanding what all their risks are, and whether these can be managed through insurance or other methods - for example, the risk of financial collapse can be manged through budgets, cash flow management and regular reporting.  Likewise, there is a reliance on brokers and insurance companies themselves as to the wording of policies and understanding what is covered and what’s not.  And lastly, it’s often not until a claim is made that the challenges around particular wording in polices reveals what is actually covered, and the meaning (or ambiguity) of policy wording emerges.  The Christchurch earthquakes put a spotlight firmly on the significant challenges around coverage. There were major issues for those with premises that weren’t damaged but located in a “red zone”; lack of clarity around the amount of time loss of profits coverage lasted when getting a business back on its feet took much longer than anticipated; and the cost of a rebuild in the disaster was the same as rebuilding when after an isolated event.

Should you self-insure?

There are already rumblings in the market about self-insuring, where a business chooses not to take out insurance and instead bears the risk with a backstop of being able to make a claim for financial compensation.  This already occurs to the extent of the excess where you pay the first agreed amount under any claim.  However, some businesses I work with are considering cancelling certain insurance, or only insuring for catastrophic events.  If you’re considering alternatives to comprehensive insurance coverage, you need to be careful about kneejerk reactions to managing the cost, and approach the risk versus cost conundrum in a structured way:

  1. Undertake a risk assessment: Most business believe they know what their risks are, but these generally include known risks or common business risks.  Therefore, start by understanding and evaluating all the risks your business faces and take steps to mitigate them.  Some mitigation can be through insurance, and some cannot. Where the risk is insurable, taking steps to lower the risk can lead to a lower premium.  For example, could theft be managed through more investment in security, or cyber threats through better systems and training?  Remember not all material business risks are insurable!
  2. Increasing the excess on the policy: Understanding what type of cover is required can significantly change the premium structure.  Most policies have a standard excess, but you need to make a sound commercial decision about the financial compensation you need in a claim event.  For example, medical insurance policies have often moved from claiming full medical expenses to just surgical costs, or businesses premises won’t claim for broken windows but catastrophic events.
  3. Bundle policies: Many insurers offer discounts if you purchase multiple policies from them. For example, you may be able to get a discount if you purchase your liability, property, and motor vehicle insurance from the same provider.
  4. Bring in the experts: Using a broker has the advantage of looking at a variety of providers, and importantly understanding the terms and conditions of different products when determining coverage and the cost of the premium, what is actually being covered for the cost of the premium, and the ability for insurer companies to pay out when a claim is made.
  5. Review your coverage annually: As your business changes, your insurance needs may change as well. The insurance market is also rapidly evolving.  Be sure to review your coverage annually to ensure you have the right policies in place, and that you're not paying for coverage you no longer need, or assume that the coverage remains appropriate when your requirements have changed or the policy wording has been adjusted.

Insurance is one of those areas where you’re damned if you do and damned if you don’t.  The premiums can be significant, and in the current environment, they’re increasing dramatically.  But if you don’t have the right coverage, an event can lead to your business facing a severe downturn or even closure.  The key is getting the balance right through understanding the risks, the scenarios in which a claim could be made, and the impact the level of coverage could bring.