Despite Australia being synonymous with economic resilience, around 70% of businesses in the country are underinsured according to Howden Re.
In a recent interview with the Australian Financial Review (AFR), Howden Pacific CEO Matt Bacon focussed on the critical vulnerability that persists across Australia’s middle market business sector – underinsurance. He said this isn’t just a statistic, it represents a systemic risk within the economy which threatens significant financial loss for these businesses.
Research shows that underinsurance is alarmingly common among SMEs, which account for 98% of Australian businesses and employ 70% of the workforce. Small businesses often lack the resources or information to secure adequate insurance, leaving them exposed to a complex risk landscape which can result in major financial and reputational loss.
Mr Bacon said, "The downstream economic flow of that underinsurance is businesses not being able to get back on their feet post a major loss and it becomes a real economic timebomb."
Too many businesses rely on outdated market or book values, that fail to account for inflation, regulatory changes, or actual replacement costs. Mr Bacon said, “Non-residential inflation has gone up 27% since COVID, so unless you are utilising a consultancy service from a broker, you haven’t had your property and your assets revalued’’ and ‘’if inflation has grown at 27%, you are likely to be 30% underinsured and it becomes a seismic issue over time’’.
Businesses Interruption (BI) is another one of the most overlooked areas. Many businesses choose indemnity periods that are too short, through underestimating the time needed to recover. Poor business continuity planning, supply chain disruptions and regulatory delays can mean recovery time extends far beyond initial expectations. Importantly, BI insurance must reflect the time to return to pre-loss profitability, not just to rebuild.
Liability insurance, excluded critical perils and cyber are some of the other usually overlooked areas.
Underinsurance has more complex ramifications beneath the surface. It doesn’t just mean insufficient coverage, it can also trigger averaging clauses, reducing payouts even further. Businesses with undervalued assets may find themselves receiving only a fraction of the sum of their expected claim settlement, compounding the financial fall out.