Underinsurance is one of the most significant risks faced by SME’s when making an insurance claim, to the point where the very survival of a business is threatened if the full recovery of losses cannot be achieved.
There has been significant discussion on the topic of underinsurance in the marketplace for quite some time now. In 2005 the Australian Securities and Investments Commission (ASIC) found that one-in-six SME’s had not insured their properties and of those that were insured, it was for significantly under replacement value. While the information that underinsurance has reached critical levels is known, the main reasons for underinsurance are still to be resolved.
THE PROBLEM OF UNDERINSURANCE
Many small business owners lack an understanding of the consequences for their business in the event of a major interruption to trading such as a fire, flood or other serious adverse event. A review of a sample of 2,000 Australian small businesses revealed some common threads in relation to underinsurance and why there is a high incidence of underinsurance amongst Small to Medium Enterprises (SME’s).
The 2001 and 2004 ABS Small Business Survey estimated just under 200,000 uninsured small businesses were operating in Australia. The one-in-six figure does not account for businesses that were underinsured or not appropriately insured. Cameron Research 2006 stated that of these businesses:
- 13% did not have fire insurance
- 65% did not have businesses interruption insurance, and
- 18% did not have burglary insurance.
Up to 70% of small businesses affected by a major loss do not recover.
With a combination of planning, professional support and adequate BI insurance cover, businesses could be well prepared to deal with unforeseen circumstances and the resulting consequences on business continuity.
Over the past few years, industry bodies such as the ICA and ASIC have tried to educate SME’s on being properly insured. However, the campaigns have had little impact on SME business insurance levels across Australia.
CAUSES OF UNDERINSURANCE
The most common driver of underinsurance is the perceived high cost of insurance premiums. However, this can be largely dispelled by the fact that small business spending on insurance represents less than 1% of their total expenses. The decision can be influenced by an inability on the part of the insured to fully understand the policy document and in some cases this can be exacerbated by the policy holder’s advisors.
A national survey of 1,200 consumers found that 87% believed it was the policy holder’s responsibility to decide on their level of insurance, 7% nominated the insurer and 5% believed a professional valuer should advise on the correct level of sum insured.
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