Many businesses adopt a set-and-forget approach when it comes to their insurance coverage – and it can be a costly error.
The failure to instigate a proper review can lead to a scenario where high insurance costs are locked in, or inadequate coverage is maintained that does not reflect the changing needs of the organisation. Given that insurance for corporations and large businesses can cost hundreds of thousands of dollars a year, it is worth asking the question of boards, CEOs and CFOs – would you be so hands-off with other critical aspects of your business operations? Not a chance.
Pressure on premiums
A passive policy on insurance is especially risky at a time when the insurance sector’s profits fell almost 50 per cent to $2.3 billion in the 12 months to June 30, 2020, according to KPMG Australia’s annual General Insurance Industry Review.
The slump resulted from factors such as the catastrophic bushfires in Queensland, NSW and Victoria, and severe storm activity across the eastern states. Ongoing fallout from the COVID-19 pandemic and a rush of business-interruption insurance claims has only accentuated the challenge for insurers. In turn, some have been forced to increase premiums and deductibles, and reduce the levels of cover they are willing to provide to cover their losses.
For businesses, this means there is additional complexity around the balancing act of getting the right insurance at the right cost. Even many large corporations may lack internal insurance resources, exposing the company to possibly over-paying for their insurance, or leaving the business exposed if it has insufficient coverage.
This is where an experienced external insurance consultant can be valuable in examining insurance rates while weighing up coverage and costs.
Test and review
To put the rise in insurance premiums into perspective, the Global Insurance Market Index from international broking company Marsh indicates that commercial insurance prices soared by an average of 15 per cent around the world in the second quarter of 2021, down slightly on the first quarter.
Pricing rose 23 per cent on average to June in the second quarter of the year in the Pacific region, where Australia is the largest market. Marsh put the increases down to rising property insurance rates, as well as spikes across the financial and professional lines of insurance.
Such price hikes and the enduring uncertainty caused by the pandemic suggest that it is crucial for companies to test and review their insurance program. Over time, business conditions change, and insurance may need to change with it.
For corporations, here are some broad actions they should consider to protect their operations.
This is far from being an exhaustive check list. Remember, though, that poorly structured insurance is not only a waste of money, but it can also have dire consequences for a company that is left without adequate safeguards. Business leaders and managers ignore such risks at their peril.