16 Aug 2017
Underinsurance explained

Underinsurance explained

Most business owners know that insurance is essential to run a business.

Yet there remains a high prevalence of underinsurance in Australia, exposing as many as 12.8 per cent of small businesses to financial hardship, according to the Insurance Council of Australia 2015 report.   

Underinsurance or having the incorrect insurance can often also determine whether a company remains open for business.

“Many small businesses are reliant on personal assets as security for their business loans, so there’s not only the risk of the business failing, but there can be a wider impact on a business owners personal life or their families,” said QBE Insurance Head of Product Commercial Lines, Russell Derrick.

 “And if businesses are inadequately insured, in the event of a significant issue that damages the business, they often fail,” Derrick added.

Underinsurance is leaving SMEs out of pocket

The purpose of business insurance is to restore a company to the position it was in before any catastrophic losses. That means if the sum insured - the maximum amount an insurer will pay in a disaster- isn’t enough to recover the bottom line, business owners are left out of pocket.

The number one cause of failed SMEs for three consecutive years is inadequate cash flow, the 2016 Australian Securities and Investment Commission (ASIC) corporate insolvencies report revealed, indicating Australia’s underinsurance prevalence as a cause for concern.

So it’s important that businesses are always armed with adequate insurance to avoid scenarios of hardship, such as the financial blow of business interruption or loss of income after a natural disaster or fire for example.  

Common causes of underinsurance

Businesses can often let the insured value fall behind their business reality because it can be a big job keeping the replacement value of business assets up to date, according to Derrick.

“For example, the business owner of a cafe doesn’t often make large critical purchases like a fridge, so it’s hard to keep perspective of the current prices of these types of expensive items if they do need to be replaced.”

He added that underinsurance often comes down to the fact that business owners simply want to get their business off the ground.

“Start-up businesses want minimal levels of costs. It’s important to have all the critical processes in place, such as insurance policies, but it’s another expense and in the beginning, might hinder their income.

“Minimising the cost and quantity of insurance may be seen as important, but as the business succeeds, it needs greater protection from insurance to help ensure the continuity of its success,” Derrick added.

“Start-up business owners are often only thinking about establishing their business, rather than protecting their business.”

So how can you avoid getting caught short?

Talk to an expert broker

As business insurance experts, brokers can find the policies that best meet your business needs. How do they work? They’re best described as licensed individuals or firms that serve as intermediaries between insurers and business owners to negotiate insurance policy contracts. 

Brokers are often viewed as professional trusted advisors and can offer strategic risk management for business. They can also help business owners who operate in niche sectors with specialised insurance needs that may not be included in a business insurance or commercial package, for example, bed and breakfasts or 24-hour convenience stores. How do you find a good one?

How to buy business insurance

Business insurance is bought through brokers. If you don’t have a reliable personal recommendation, the National Insurance Brokers Association (NIBA)* can help you find an accredited broker. When you’re choosing a broker it’s wise to check their credentials and determine whether they’ll be a good fit for you.

This advice is general in nature and has been prepared without taking into account your objectives, financial situation or needs and may not be right for you. You must decide whether or not it is appropriate, in light of your own circumstances, to act on this advice. To decide if QBE’s products are right for you, please ensure you obtain and consider the Policy Wording or Product Disclosure Statements and Target Market Determinations, available online at QBE.com/au. Insurance issued and underwritten by QBE Insurance (Australia) Limited (ABN 78 003 191 035, AFSL 239545).

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