The year 2022 saw the strongest small business boom since 2017, but now inflation puts it all at risk as insurance coverage gaps spread further apart.
A press release from BizCover alleges that losses due to storms, fire, and other major disaster events could result in insurance claim payouts that fail to cover the total cost of replacement due to differences between what the business has insured and the costs of rebuilding.
According to BizCover small-to-medium enterprise (SME) insurance expert Jane Mason, what was the right cover a year ago may not be enough now due to the rising cost of materials.
“The effect inflation has on replacement costs cannot be overstated,” Ms Mason said.
“Aussie businesses could be left with a serious financial crisis by not having enough coverage to cover your loss.”
Last year, the price of steel rose 42 per cent, timber, board, and joinery rose 20.6 per cent, and glass rose 14.1 per cent. According to research from CoreLogic, the overall price of building construction rose close to 12 per cent over the year to December.
“Even if your building is totally destroyed and needs to be rebuilt, if the cost to replace it has gone up due to inflation, there may be a gap between what’s covered and what you’ll need to pay,” Ms Mason said.
According to the Australian Banking Association, SMEs are the lifeblood of the economy.
Of the 2.6 million businesses across Australia, 98 per cent are SMEs.
They make up gyms, florists, hairdressers, real estate agents, butchers, mechanics, restaurants and more, which create jobs and stimulate the economy.
A spokesperson for the Insurance Council of Australia (ICA) said that underinsurance carried serious implications, including for small businesses. However, people often don’t know they’re underinsured until they need to rebuild or repair.
The ICA said small business owners were being left to discover at their time of need that their premium did not cover the cost of repairs, leaving them with a significant financial headache.
How can small business owners avoid the risks that come with inflation?
BizCover said while inflation continued to linger, small businesses could take some steps to avoid being underinsured, such as regular assessments of exposed risk to ensure coverage was lifted to the current value of their assets.
“It’s important to insure your business for an amount that is sufficient to cover not only the tangible assets, but the cost of repairs and any other variables that might leave you out of pocket,” Ms Mason said.
“Consider jumping online to compare quotes so you could then decide whether the price of the cover justifies the protection.”
The ICA said it was important to shop around to find the best-suited policy that fits into own needs and preferences.
“Different insurers may calculate business insurance premiums differently, according to their business model and the unique requirements of the business they are covering,” an ICA spokesperson said.
ICA also suggested different ways for small businesses to reduce their premium costs while making sure they were adequately covered, which include the implementation of greater security and extreme weather protection measures.
Business owners could also take out multiple policies with the same insurer and pay a higher excess, as well as reduce riskier activities and seek a broker’s advice.
The Australian small business and family enterprise report for 2022, released by Small Business Loans Australia, outlines further challenges SMEs believe they will endure throughout 2023, with fast-rising inflation at the top, equating to 42 per cent.
However, in January 2023, the International Monetary Fund estimated that global inflation would trend down from 8.8 per cent in 2022 to 6.6 per cent in 2023 and a further 4.3 per cent in 2024.