Insurance
Thursday, 23 August 2007
Last Updated: Thursday, 23 August 2007
In this section:
If you want to bargain hard to reduce premiums, time is running out.
By Kristen Le Mesurier
Insurance companies have never had it so good. Their margins are fat and their returns to shareholders are approaching record highs. Insurers, brokers and analysts all agree: if you want to bargain hard to reduce your premiums, now is the time.
Unprecedented profits boosted by strong balance sheets, healthy equity markets and low claims, are enabling insurers to cut premiums and take on more risk.
But analysts say SMEs must act quickly because the conditions will change this year.
“The turning point in the commercial insurance cycle is within sight,” says JPMorgan and Deloitte’s latest survey of the general insurance industry, released in December.
This means that businesses can expect to see their premiums fall “modestly” in 2007 before stabilising and possibly rising in 2008. “The message we are trying to send is prepare for the future at this juncture, lock in low premiums, because there could be a harder insurance market cycle somewhere in the next two to three years,” says Scott Leney, general manager of placement services at insurance broker Marsh.
Falling prices
But many small and medium-sized businesses will doubt that low insurance premiums are at all possibile.
Prices have indeed fallen since 2004, and unlike in the past when corporations have been the big beneficiaries, small and medium businesses have snared some reductions.
Fire and commercial property insurance have led the price falls, with premiums for small and medium businesses falling by 10% in 2006, according to JPMorgan and Deloitte. Professional indemnity, liability and commercial motor insurance followed, with reductions of 9% and 8% in 2006 respectively. The cost of directors and officers insurance fell by 6% for SMEs in 2006.
But small and fast-growing businesses say few have secured these rate reductions. Glenn Davies, managing director of the Mynt Group, a Sydney recruitment firm turning over $10 million a year, says: “I haven’t seen any reductions and I’ve had no contact from my insurer saying, ‘Congratulations, your premiums are falling’,” he says.
Business owners in this camp should call their insurer and haggle over price. Ian Baldock, the executive director of Queensland Retail Traders and Shopkeepers Association, fears that most of his members are missing out on rate reductions because they push calls to their insurer to the bottom of their to-do lists. “Rather than look to see what’s available in the marketplace, I think insurance sits there in the category of, ‘Oh yes, I’ve been with that insurer for three years, I’ll just pay the same premium again’,” Baldock says.
Take advantage of the buyers’ market
Industries that have fought the tag “too risky to insure” are getting access to insurance for the first time in years. Franchisors — the frequent target of litigants — are now able to take out management liability insurance that covers risks including professional indemnity and public liability. “That is such a coup,” says Richard Evans, the executive director of the Franchise Council of Australia. “Some franchisors have never had access to these insurance policies.”
The FCA had to step into the insurance market itself to secure that coverage, however. Four years was spent structuring a partnership with insurance broker Willis Australia; a new wholly owned FCA company called FCA Insurance Services will act as an authorised representative of Willis and sell standard insurance packages to eligible franchisors for 25-30% less than franchisors now pay.
Willis Australia’s David Carter says franchisors battled to get insurance because few insurers understood the risk of claims. “Big brands can be a beacon for litigants or disgruntled franchisees, but we believe that the risk has been misunderstood,” Carter says.
How to win over your insurer
Insurance premiums are a function of risk. The higher the chance and the cost of a claim, the more an insurer will charge. “The best way to secure cheaper premiums is to demonstrate that the risk of insuring you has fallen,” says Stephen Moir, the managing director of Western Australia’s Small Business Development Corporation.
Businesses will need to demonstrate, rather than promise, reduced risk. Promises that new safety rules will reduce the risk of accidents, for example, will fall on deaf ears: insurers will demand evidence before they cut premiums. That means documenting the success of risk management strategies over time.
“Now is the time to invest in a risk consultant who will visit and produce a property underwriting report to the insurer. You need to produce information that best describes risk and how you’ve improved it,” says Marsh’s Leney. “Right now, in a soft market there are opportunitistic players that are willing to take more of a gamble, but when the market hardens in the next couple of years, insurers will charge for uncertainty once again, and that takes two years of evidence to prepare for.”
Supermarket owners, for example, should set out safety rules that minimise the chance of accidents and their severity. This would include procedures dealing with spillages, maximum heights for displays and keeping aisles clear. The way a business responds to an accident can be just as important. Staff or customers may be more likely to pursue legal action if they feel the business owner or employees are irresponsible or uncaring.
Selecting an insurer that knows your industry is crucial. Businesses with a claim lodged during the year will be slugged with a higher premium at renewal because insurers that don’t understand the particulars of a claim — why the damage occurred and whether it is likely to occur again — are likely to overreact and charge through the nose for higher risk.
Remember that the more predictable a risk is, the more it will cost to insure. It can be cheaper for businesses on a main road to pay for damage to broken windows, for instance, than to pay the cost of insurance.
Are you underinsured?
SBDC’s Moir is amazed that so few businesses regularly review whether they are appropriately insured. “The basic question — ‘if I lost everything today what would it cost me to re-establish tomorrow’ — is rarely asked. There is no detailed analysis on risk and what should be insured,” Moir says.
Fewer still look at their policies in detail. This is a recipe for disaster, given the exclusions lurking in the fine print. “An average clause can cripple business owners. For example, if your $100,000 property was burnt down and your coverage was for $50,000, the payout would be $25,000. Most business owners aren’t aware that average clauses mean that the payout is reduced by the percentage that you’re underinsured by,” Moir says.
This is alarming considering that 76% of small and medium businesses are underinsured. “Typically, 17% of SMEs don’t have enough insurance, a further 17% of SMEs have no insurance and 42% do not have insurance to cover them should their business close for a period of time,” says Scott Millmot, the national manager of sales and service at AON Insurance.
How to get the best deal
- Shop around. Insurers are fighting for market share in small business lines and some will be willing to take on more risk than they have in the past.
- Consider your risk profile from the insurer’s perspective and adopt risk reduction strategies that will minimise the insurer’s exposure to loss.
- Select an insurer or broker that understands your industry and knows your claims history.
- List the risks that pose the biggest threat to your business and insure against those.
- Weigh up the cost of insuring predictable risks: these are the most expensive to insure.
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Poor e-commerce, low innovation and extreme events are just a few of the hurdles the insurance industry has to overcome in the next few years.
By Jason Baker of IBISWorld
Opportunity: Extreme events, not much on the innovation front and poor e-commerce are hurdles the insurance industry is poised to overcome.
Warning: The general insurance industry is in the decline phase of its life cycle, with revenue growth for the industry continuing to be low over the next five years, averaging just 1.2% a year to reach $41.6 billion in 2012.
The reason for this stark prognosis is multi-faceted: revenue growth has been, and will continue to be, below GDP and there has been little product innovation in the industry in recent years, with insurance products beginning to resemble price-driven commodities.
Industry revenue has grown from $35.36 billion in the 2002 financial year to an estimated $39.2 billion in 2007 – an annual growth rate of just 2.1%.
However, in the same period, the industry's gross product, or value added, grew by an average of 33% a year. This growth does not, however, mean the industry has dramatically increased its profitability in that period. Rather it is a reflection of the industry's recovery form the fallout of the September 11 terrorist attacks on the United States in 2001 (see chart).
Extreme events force rethink
IBISWorld has identified climate change as one of the greatest challenges facing the general insurance industry in the next few years.
A timely reminder of this challenge was the record US hurricane season in 2005, as well as the impact of tropical cyclone Larry in Queensland last year.
Until quite recently, trends in the insurance industry were driven predominantly by socio-economic factors, such as population growth, population concentration and rising amounts of increasingly valuable assets in areas prone to storm and flood risk.
These factors focus on loss severity, but more recent evidence suggests an increase in the frequency of extreme events. Insurers and reinsurers need to financially assess the impact of a higher frequency of extreme events, the impact of climate change and what it signifies for extreme weather as well as average weather conditions.
Recent experiences have forced a rethink around the modelling techniques used to monitor the severity and frequency of extreme events as well as the accumulative risk insurers are exposed to.
The industry will also need to increase its utilisation of electronic distribution channels in order to increase its operational and cost efficiency. Personal general insurance is perceived as being ideally suited to internet delivery.
Australian insurers lag
Some industry analysts have suggested that the insurance industry in Australia is behind other finance-based industries in developing e-commerce solutions. It has been suggested that industry participants are vulnerable to foreign and more dot-com savvy companies, especially in an environment that is becoming increasingly competitive and globalised.
Further, banks continue to increase their market share in the area of general insurance. As a result it is expected that the industry participants will become more customer-focused rather than product-focused, as companies pursue ways to secure relationships with their customers. Multiple item discounts and loyalty programs are ways that some companies may establish a multiple product relationship with their customers.
Greater concentration
The maturity of the general insurance industry is likely to lead to a greater level of concentration in the years to come. Currently industry concentration is rated as medium.
However there is significant dominance by the industry's larger participants, with the top four insurers accounting for 41% of the industry's gross premium income, and the top 10 companies accounting for 57%.
Concentration levels have been steadily increasing over the past five years. Since 2002, the number of industry participants has shrunk from 168 to 148 at present.
IBISWorld forecasts that in the next few years, the top five industry participants will be largely responsible for further concentration in the industry. They are expected to achieve this increase of market share through merger and acquisition activity and the competitive pursuit of market share.
The top five participants in the Australian general insurance industry are: the Insurance Australia Group, which owns NRMA and CGU; the Promina Group, which owns AAMI and the Australian Pensioners Insurance Agency; Allianz; Suncorp-Metway, which owns AMP and GIO; and QBE.
IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au
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By James Dunn
A lack of attention to insurance could be the Achilles heel of Australia’s 1.66 million small business owners. According to the Insurance Council of Australia (ICA), one in six small businesses – more than 270,000 businesses – are not insured.
Many SMEs have insurance, but are under-insured. Commercial insurer CGU says 65% of small businesses have no business interruption cover, 47% do not adequately insure their stock and contents, and 82% of businesses that own buildings do not insure them appropriately.
The Australian Bureau of Statistics (ABS) says that one in six home businesses – of which there are 800,000 in Australia – are either under-insured or not insured at all.
It is small wonder that the reliance by home business operators on their home and contents insurance policy is considered the industry’s “black hole”.
“It’s an alarmingly common misconception that a home-based business’s risk is covered by a standard residential home and contents insurance policy,” says Mike Hooton, marketing and operations director at general insurance group Calliden.
“In most cases, this is not true, leaving business owners at risk of losing not only their business but their home as well,” says Hooton.
Small business insurance falls into three basic categories:
- Liability – legal obligations arising from injury to others or damage to their property.
- Assets and revenue – things the business owns and its revenue-generating capabilities.
- Personnel – protection against loss arising from personal accident or illness involving the owner of the business, or its employees.
A business’s priority should be the compulsory insurance that is required, particularly if the business is employing people, such as workers’ compensation insurance and compulsory third party (CTP) motor insurance.
Public liability should really be seen as a pre-requisite for setting up any business, certainly if it is hiring or leasing premises. Professional insurance is only relevant for small businesses that are giving professional advice.
Next, a small business should think about protecting its assets – and its revenue. Fire and perils insurance and burglary insurance protects the assets, but business owners must give the same attention to the revenue.
Nicholas Scofield, general manager of corporate affairs at Allianz Australia, says business interruption insurance, which protects the revenue from damage to the property that generates it, is a must.
“Many businesses fail to recover from a major event such as fire, storm or earthquake, because overheads such as wages, loan repayments and rent continue, and key customer accounts need to be managed, even though the business may be unable to trade,” he says.
Scofield says more than half of businesses that suffer a physical loss and that do not have business interruption cover will not resume their normal business operations. But in a classic case of false economy, the ICA estimates that 42% of small businesses do not take out business interruption insurance. Hooton believes this figure is closer to 60% to 70%.
“Either they don’t think it’s going to happen to them, or in the economics of setting up a new business, it is not seen as a particularly important expense. They don’t see the consequences of damage and the physical loss to the asset itself. Business interruption insurance is like income protection, but for a business. It’s prudent to have some form of income coming in, to get the business back on its feet quickly, or to replenish the income you’re going to lose.”
Next comes the insurance that relates to personnel. In many cases, much of the business’s intellectual property is carried inside the owner’s head – so “key person” insurance is critical. The cover can be restricted to personal accident, or it can be extended to include full income protection, which would cover the key person for accidents, sickness etc, and is a much broader cover.
Some businesses will want to look at business expenses insurance, possibly as an adjunct to income protection. If the business stops operating, the owner’s income might be covered by income protection, but if the ongoing expenses of the business – for example office rent, business mortgage or loan repayments, equipment leasing costs and utilities payments – aren’t covered, the owner might need to use the income protection proceeds to pay those, to keep the business out of bankruptcy.
Ideally, a business owner would have the business’s net profit covered by income protection, any loans covered by term insurance – possibly with some total and permanent disability (TPD) cover – and the expenses covered by business expenses insurance.
Scofield says an adequate insurance plan involves thinking not only about the major categories, but some of the more specific cover needs, for example theft or fraud; breakdown of machinery, in particular information technology and communications equipment; loss of or damage to money being handled by the business; the risk of loss or damage while transporting goods or property to or from the business’ premises.
Lastly, even if a small business thinks it has adequate insurance in all of these categories, insurance should never be considered a set-and-forget investment. Small businesses need to make sure that their insurance cover keeps pace with growth in their business – and inflation.
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