How to Avoid Underinsurance in Business

We often hear heart-wrenching stories about the devastation uninsured businesses suffer following major weather events such as floods or cyclones. Particularly, the stories we hear from business owners who thought they were adequately insured but weren’t. In other words, underinsurance.

 

What is Underinsurance?

Underinsurance occurs when the amounts listed on your insurance policy are inadequate. In other words, it’s not enough money to cover the total cost of rebuilding, repairing or replacing buildings, equipment, contents, loss of income or other business assets.

The numbers are alarming.

A 2019 study by one of Australia’s largest insurers, QBE, suggests that 62% of all Australian Small & Medium Enterprises (SMEs) are probably underinsured. A further 87% of small business owners felt a large liability claim could put them out of business or cause them to lose significant revenue or dry up cash flow.

Shockingly, the Insurance Council of Australia’s report found that 26% of SMEs operate without general insurance – including a whopping 40% of sole traders.

Source: QBE SMEs and Insurance Report 2019 (Pg 10)

Did you know?

In 2020, reports revealed $US268 billion in economic losses globally. However, only US$97 billion were covered by insurance, leaving a staggering gap of US$171 billion, or 64% not protected by insurance.​​​​​​​

Source: Aon Weather Climate & Catastrophe Insight Report 2020.

Why are so many businesses underinsured?

There will always be businesses that actively choose to have no insurance. However, data shows that many companies don’t even know they are underinsured.

Typically, it’s because business owners choose to ‘go it alone’ without the aid of an experienced risk and insurance adviser.

Are you at risk of underinsurance?

Knowing if your business insurance is adequate for your operations and industry can be tricky without expert advice. However, with a knowledgeable insurance adviser, you can dive into your insurance coverage to identify any issues.

Knowing the accurate replacement values for your business assets ensures the sums listed on your policy are accurate. Independent assessors can work with you to create an accurate asset schedule with replacement costs for your business.

 

The benefits of checking your insurance cover.

We help clients identify their underinsurance exposure. The table below shows four real-world underinsurance examples that our risk reviews and independent professional rebuilding valuations uncovered in the last 12 months.

 

Client	Underinsurance for Material Damage	Underinsurance for Loss of Profits
Case Study 1	Shortfall $ 12.2m or 20.75%	Shortfall $3.8m or 10.77%
Case Study 2	Shortfall $ 5.3m or 33.69%	Shortfall $ 3.1m or 29.38%
Case Study 3	Shortfall $ 1.9m or 4.91%	Shortfall $ 10.5m or 27.59%
Case Study 4	Shortfall $ 13.6m or 23.4%	Shortfall $ 22.3m or 44.78%

 

On average, the businesses were underinsured for material damage by 20% and loss of profits by 28%. The companies would have to pay the financial gap to rebuild or cover losses following a business interruption event.

With expert advice, these clients now have appropriate sums insured and adequate cover for their business needs.

 

 

Always know your cover.

They say, ‘ignorance is bliss’. However, when it comes to underinsurance, knowledge counts. Therefore, it’s vital to start understanding the risks unique to your industry and business operations and how to mitigate them.

At Clear Insurance, we take the time to get to know you and your business. We build your understanding of risk and review your insurance program against your risk appetite. We’ll recommend the necessary steps you can take to ensure you are – and remain adequately protected.

 

Contact Clear Insurance today to see how our risk review can check your insurance cover is on the right track.