How to save on insurance costs without jeopardising cover
It would be fair to say that a lot of SMEs are doing it tough at the moment. Challenging economic conditions are impacting all kinds of businesses across different sectors and industries. Inflation (3.6% in the March 2024 quarter), higher interest rates (cash rate was 4.35% in May 2024), labour shortages (3.9% unemployment rate in March 2024), waning consumer confidence, and rising prices across the board are all driving up the cost of doing business.
The tenuous situation for SMEs is borne out by the statistics.
Data from ASIC showed a marked increase in the number of company insolvencies from 1 July 2023 to 31 March 2024 – 7,742 businesses entered external administration, representing a 36.2% rise from the same period a year earlier. It is expected that the number will reach 10,000 by the end of the financial year – a decade high. The data also showed the number of restructuring cases rose 294.6% (to 878 cases) and court liquidations were up 218.8% (to 1,593 liquidations). This figure was higher than those recorded for the entire preceding fiscal year (ended 30 June 2023).
Debt crackdowns by the ATO and banks contributed to wind-ups for businesses surging by 133% in the first half of FY24, according to data from Insolvency Australia. Statistics from the Australian Financial Security Authority showed that personal insolvencies for business owners rose 17% in February 2024.
The Australian Institute of Company Directors noted that for the period 1 July 2022 to 30 June 2023, SMEs dominated corporate insolvencies, with 83% of businesses declared insolvent owning assets of $100,000 or less, 82% employing fewer than 20 staff, and 68% owing liabilities of less than $1 million.
The number of insolvencies is having a flow-on effect. According to one trade credit insurer, on average, 115 claims are made each month, with an average gross value of $91,000.
According to Xero’s Small Business Index, sales growth was -2.4% year-on-year in March 2024, while wages grew 3.6%. The average length of time small businesses waited to be paid was 22.2 days in March.
In light of the sobering statistics, it is little wonder that some SMEs may be looking at ways of reducing business costs.
Insurance is an expense businesses may be trying to reduce. For some, the cost of cover can represent a large outlay.
According to the Vero SME Index, 40% of businesses said recent events, including current economic conditions, made them question their insurance cover.
The Index also found that, over the last year, 51% of businesses claim to have made changes to their insurance as a direct result of the economic conditions, and 83% of businesses are considering changes to their insurance in the future.
For SMEs looking to modify their insurance program, working with their broker is the best way to reduce the risk of making changes that negatively impact the business, for example putting it at risk of underinsurance.
Your EBM Account Manager can work with you to implement strategies which will help achieve your goals, but not jeopardise your business. For 82% of SMEs, having insurance gives them peace of mind and 76% want to insure every risk they possibly can.
Insurance cost-reduction strategies
- Conduct a comprehensive insurance needs assessment
Carefully consider risks and your options for managing those risks. Not all risks can, or should be, transferred to insurers. When it comes to business packs, there can be various policy options from which you choose to suit your business. Be sure to select the covers you need and avoid options that you don’t. Also be sure to consider the most appropriate levels of cover and adjust these to suit your current operating environment.
- Review risk profile and management strategies
The risk your business represents to an insurer is reflected in the premiums you pay. A demonstrated proactive approach to risk management can positively influence those premiums. The SME Index found 80% of businesses want their broker to evaluate their risk profiles. A clean claims profile can also make it easier to negotiate better premiums with insurers.
- Bundle covers
Instead of taking out various separate policies, like property damage, business interruption, theft and public liability, it may be possible to ‘bundle’ the covers together into one business pack. This can often result in a saving, especially for SMEs. Be aware, however, that not all insurances (for example, workers compensation) can be combined into a single pack.
- Increase excesses/deductibles
An effective way to reduce premiums for many assets may be to opt for a higher excess (an excess is the portion you agree to pay out of pocket before your insurance coverage kicks in). By agreeing to increase the amount you will pay in the event of a claim, the insurer will generally reduce the premium. As you will need to have the higher amount readily available if you ever need to make a claim, you should carefully evaluate your financial situation and risk tolerance before adjusting your excess amount.
- Reduce policy limits
Review your policy limits (the maximum payouts you will receive if you make a claim) to see if there are any that may be reduced without detriment. The limits should be commensurate with your risk profile and not excessive for your circumstances. However, reducing sums insured on building and contents simply to lower the premium is not recommended as you run the risk of underinsurance if the replacement costs exceed the insured sums.
- Prioritise covers
It may not be financially viable for you to insure all the risks and exposures that your business faces. If this is the case, you can prioritise what you choose to insure. Look at the risks with the biggest financial impacts and risks that you could not financially survive – not necessarily the risks with the greatest probability of occurring. Prioritise adequate cover for those risks that could seriously impact your business, for example liability covers such as cyber or management liability, and business interruption. Always ensure that you hold mandatory insurances such as workers compensation and compulsory third party vehicle, and those required to operate or maintain a licence such as public liability or professional indemnity.
- Self-insure low-impact risks
If insuring all risks is not viable, consider self-insuring (that is, not taking out a policy but covering any loss yourself) risks with a low financial impact. For example, some aspects of property cover may be suited to self-insurance such as glass breakage or theft. If you decide to manage a risk yourself (that is, not transfer it to an insurance company), consider establishing a contingency fund to help cover any losses incurred. If you are leasing premises, check the conditions of your lease before deciding to self-insure. Some will require particular covers.
- Update sums insured
Reviewing sums insured not only allows you to adjust the sums to reflect the increased cost of replacement, but can also indicate which items may be over-insured or simply do not require cover (for example, unused equipment or an asset that has been sold). Engaging a valuer to assess the replacement costs of your buildings, vehicles, equipment, other infrastructure and assets is recommended.
- Review indemnity periods for Business Interruption
Choose an appropriate indemnity period based on realistic business circumstances. While most businesses will generally need at least 12 months to return to pre-insured event trading status, this may not be the case for your business and a shorter indemnity period may be suitable.
- Technological innovations
Invest in technology to boost your business’ efficiency and productivity. This can help to reduce risks and possibly premiums too.
- Premium funding
Although this will not reduce the amount of premium you pay, it will spread the payments out, potentially helping with cash flow. Your EBM Account Manager can provide you with further details.
Your EBM Account Manager will do the ‘shopping around’ for you to ensure you get the cover you need for a fair price. Beyond securing your insurance policies, your broker is also a trusted risk adviser. Get in touch ahead of renewal to explore your options.
