Brokers pivotal in helping solve underinsurance crisis

From the Black Summer bushfires and the pandemic to floods and supply chain issues, Australian small businesses have gone through a lot in recent years. But through bravery and resilience, many are finally beginning to see the light at the end of the tunnel.  

Yet bubbling under the surface, a new crisis has emerged – one of underinsurance – and it might be up to brokers to help SMEs avoid the risks. 

“Some small business owners that try and save money by reducing their coverage may not be aware of the risks of underinsurance. Recent events such as the pandemic can impact the operating landscape of many businesses and may leave businesses underinsured in the event of a claim,” says Jane Mason, BizCover for Brokers (B4B) Head of Product Channels and Risk.  

“It’s the perfect opportunity for brokers to advocate for their clients, explaining underinsurance in simple terms and urging them that their business insurance policy is not a set-and-forget product.”  

The perfect conditions for an underinsurance trap  

In normal conditions, underinsurance is still an issue. The situation often arises when a client reduces coverage, cutting costs to a point where the loss exceeds the sum covered by the insurer.  

Nor is underinsurance a new phenomenon. A 2019 broker survey found an estimated 45% of new clients existed in a business that was underinsured or not insured at all. 

But the recent string of adverse events has laid the foundation for an underinsurance trap.  

In a conversation with BizCover for Brokers, a spokesperson from the Insurance Council of Australia says there have been 11 declared “insurance catastrophes” from the Black Summer of 2019-20 to the recent NSW floods.  

“This has resulted in more than 720,000 disaster-related claims totalling more than $11 billion in insured losses,” the spokesperson says.  

Add the combined effects of a chronic labour shortage and the rising costs of materials, and you’ve got the perfect storm of conditions for underinsurance.  

With the level of risks rising, small businesses could be underinsured even without reducing their coverage, as the previously set insurance values may not be enough for 2022.  

“While the reasons for underinsurance are complex, brokers can help their clients avoid the pitfalls of underinsurance,” says Mason.  

Making clients aware of the risks  

To most policyholders, the term underinsurance seems like insurance industry jargon, designed to be not transparent and confusing.  

Many clients are also just simply unaware, with an ICA study showing only 2% of companies knew that they were underinsured, with common reasons given being:  

· I can’t afford to pay for more insurance  

· Premiums are too high 

But when these reasons are compared against the possible outcome of underinsurance, the risks of underinsurance seem to outweigh the short-term savings.   

Below is an example of a Co-Insurance clause in action. It shows how the underinsurance penalty is triggered by a discrepancy between the insured value and its actual real value – even if the claim is less than the insured amount.  

Say your SME client insured their business for $300k but its true value is $500k. A flood causes $200k worth of damage to the business and your client makes a claim. Since the value of the damage is more than 10% of the total insured value, the Co-Insurance clause is activated.  

Essentially, the insurer will multiply the sum insured by the damage and divide it by 80% of its true value.  

After some maths, you will find the insurer will pay $150k.  

$300k (sum insured) x $200k (Damage) / $400k (80% of true value) 

=  $150k claim result (paid by insurer)  

= $50k (in damages left to pay) 

What is important for clients in the above example is that their out-of-pocket expenses add up to $50k. And for many small businesses, that amount could be too much to cope. 

The benefits for brokers 

While providing a proper risk analysis about the effects of underinsurance may be beneficial for clients, it’s also just as essential for brokers.  

“Failing to maintain appropriate coverage or explain this risk of underinsurance could expose the brokers’ own E&O,” says Mason. underinsurance is not only relevant for sum insured or limits of liability but also for uninsured exposures. 

“A client can be underinsured across multiple areas. While they may be adequately covered for Professional Indemnity insurance, for instance, have they thought about the exposures covered by a Management Liability or Cyber Liability policy?” says Mason.   

For many clients, these are seen as secondary exposures and not always an easy sell, and for the broker, obtaining quotes from multiple insurers for multiple products can be time-consuming, with the possibility of little to no return if the client does not bind cover. It is these situations where the rise of Insurtechs is providing real benefit to brokers allowing them to access markets and obtain quotes quickly and easily.   

“Our BizCover for Brokers platform allows brokers to quote, compare and bind multiple products in minutes. Many of the inefficiencies that brokers experience in the traditional broking process is removed from the equation with our offering,” says Mason. “This allows brokers to do what they do best, advocating for their clients and ensuring that they are adequately insured.”  

The bottom line 

While the current environment heightens the risk for underinsurance among small businesses, it can also be seen as an opportunity for brokers to cut through the jargon and engage in a conversation with their clients.  

And, through the use of Insurtechs, brokers can turn this into an opportunity to widen their client’s coverage while simultaneously reducing the risk of E&O claims. 

*The information in this article is general only and should not be relied upon as advice. BizCover for Brokers is a registered business name of BizCover Pty Ltd (ABN 68 127 707 975; AFSL 501769).