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Owners of small to medium sized businesses are often the front facing employee, the manager, the chief of operations and the CEO of everything. When it comes to reviewing your business insurance cover, Gallagher SME expert Amanda Stevenson offers an insurance and risk prioritisation strategy to consider.

For some cash-strapped SMEs the option of simply covering all risks via insurance just isn't viable and many businesses are looking to selectively insure. If this is the case, an effective approach may be to consider instead insuring against the risks with the biggest financial impact and the risks that ultimately you can't financially survive.

When evaluating risks the common approach for many business owners is to insure against what they believe is most likely to occur: a break-in, for example. A break-in would most likely result in the loss of money, inventory and could also involve broken glass.

Of course, this would cause distress and impact, causing a temporary disruption to business operations — but the financial loss would be unlikely to jeopardise business survival.

Coverage Premium Cost Financial Loss Excess Payable Recovery

Glass
Replacement Value

 $343.02 $1,200.00 $500.00 $356.98

Theft of Contents
$20,000

 $546.42 $2,000.00 $500.00 $953.58
Theft of Money
$5,000		 $294.51 $1,000.00 $500.00 $205.49
$1,183.95 $4,200.00 $1,500.00 $1,516.05

So instead of focusing on business risks in terms of probability, which may be high frequency incidents with low severity financial losses, consider options to reduce insurance or self-insuring* low impact risks (*which means not insuring, ie. the business absorbs any financial losses).

Evaluate and insure more considerably the higher impact risks exposures with low frequency but high financial severity. These are the losses that have the potential to result in serious impact to your business and may be a more worthwhile investment in insurance premium.

Coverage Premium Cost Financial Loss Excess Payable Recovery

Cyber
$500,000

 $1,527.79 $300,000 $2,500.00 $295,972.21

Management Liability
$1,000,000

 $3,457.52 $125,000 $5,000.00 $116,542.48
Business Interruption
$500,000		 $1,551.83 $250,000 $500.00 $247,948.17
$6,537.14 $675,000.00 $8,000.00 $660,462.86

Three important business insurance policies well worth considering

Cyber insurance, management liability and business interruption provide cover that is often regarded as a luxury add-on-but as the graphic above shows they often result in significant disruption to your business.

Cyber insurance is fundamental to any business, and it's a mistake to assume that cyber criminals only attack large organisations: attacks on SMEs are also increasing in frequency and costs which typically run into tens of thousands of dollars.

Management liability insurance provides cover for management risks that includes directors and officers' and statutory liability, crime and the costs associated with an Australian Tax Office investigation, plus employment practices liability.

Business interruption insurance enables you to maintain liquidity and pay rent and wages during eligible disruptions that force you to cease trading. It's important to select the maximum indemnity period to ensure claims payouts would cover extended durations of business trading impact to allow for worst case scenarios, such as fire, for example.

How to prioritise your business insurance premium spend

To help identify the key areas where premium spend can make a strategic difference these are suggested considerations to take into account when evaluating business risks:

  • cost of premium
  • insurable value (sums insured)
  • excess payable
  • cost of financial recovery.

These figures should demonstrate where to prioritise premium spend. The important issue is whether your business could survive if you had to cover the losses yourself. You may well find that cyber, management liability and business interruption may be essential to providing financial protection for your business.

Review values to ensure business insurance cover stays adequate

Along with updating sums insured to cover investment in a new plant, for example, if you own your business premises it's critical that your cover reflects today's cost of total replacement in the event of a disaster.

Failure to insure assets for their current replacement value can result in insurers reducing a claim payout proportionately to the shortfall in the premium paid.

Our recommendation for avoiding underinsurance is to obtain a professional valuation which not only helps ascertain how much you should insure for, but also assists in determining values if you need to claim for a loss.

We're here to help. Connect with one of our experts who can help you organise a professional insurance valuation and address underinsurance today.

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Disclaimer

Gallagher provides insurance, risk management and benefits consulting services for clients in response to both known and unknown risk exposures. When providing analysis and recommendations regarding potential insurance coverage, potential claims and/or operational strategy in response to national emergencies (including health crises), we do so from an insurance and/or risk management perspective, and offer broad information about risk mitigation, loss control strategy and potential claim exposures. We have prepared this commentary and other news alerts for general information purposes only and the material is not intended to be, nor should it be interpreted as, legal or client-specific risk management advice. General insurance descriptions contained herein do not include complete insurance policy definitions, terms and/or conditions, and should not be relied on for coverage interpretation. The information may not include current governmental or insurance developments, is provided without knowledge of the individual recipient's industry or specific business or coverage circumstances, and in no way reflects or promises to provide insurance coverage outcomes that only insurance carriers' control.

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