The role of business insurance is to protect owners from the consequences of unexpected events, but with many businesses across New Zealand currently underinsured, recovering from loss is a growing challenge.

The recent Vero SME Insurance Index revealed that about 70% of SMEs are significantly underinsured. In addition, premium increases have caused many businesses to reduce their cover, which can prove a devastating decision when they need to make a claim.

Mark Taylorson, head of specialisms at insurance brokerage Gallagher, describes recent conditions in New Zealand as a “perfect storm” for underinsurance.

“We have had insurance rate increases, plus significant inflation and supply chain challenges, which have increased the overall cost of insuring to value,” says Taylorson, who presented recently at a CA ANZ event in Queenstown about global risk.

“The result is that a lot of businesses are resistant to amending their insured values due to the strain on operational expenditures and are significantly underinsured, and that’s a major issue.”

Underinsurance is risky

There are many risks if a business is underinsured. “We’ve seen situations where businesses are so underinsured that they can’t fully reinstate an asset because the cost to rebuild after an event is much higher than their insurance will cover them for,” says Taylorson.

Business interruption is also an area of underinsurance. “If you have a loss, the material damage element of your policy may provide cover, but often clients will underestimate the consequential losses and interruption costs to their business.”

Business owners can underestimate their required indemnity period, which is the amount of time they are insured for after an event.

“The standard may be six months or a year that an insurance company will pay for you being severely impacted, but the reality of losing a major asset in your business is that you may not be up and running at full capacity for a couple of years, so it is important to consider longer indemnity periods for key assets,” says Taylorson.

Sourcing the right cover

Ross Williams, account director at Gallagher, says accountants play an important role in helping their clients determine the cover they need.

“Businesses often look at last year’s accounts to set their profit or their business interruption cover for the year ahead, but they should be thinking, what’s the plan for the business in 12 months’ time? What targets do they want to reach? That will help them to determine the suitable level of insurance cover.”

Williams adds that accountants often advise their clients to shop around for cheaper insurance, before advising them to address the level of cover that they need for the next 12 months.

“Research from Vero shows SMEs are prioritising price when making insurance decisions, but the number one consideration should be, how much cover do I need?

“Seeing an underinsured client in a total loss situation is horrendous,” adds Williams. “If they’re lucky, the cover may be enough to pay the bank, but then they still can’t trade because their insurance cover wasn’t enough to reinstate the business.”

Benefits of a second opinion

Taylorson says with a softening insurance market it’s an ideal time to seek a second opinion about business insurance.

“There is more capital in the New Zealand market and more global players have come into our market, so it’s a good time to capitalise on that.”

Taylorson adds that Gallagher’s market position allows it to “gain traction with key strategic partners”.

“We would welcome an opportunity to provide a second opinion on insurance cover because, with our market reach, we’re able to drive a lot of competition and get great outcomes for clients.”

Contact your local Gallagher broker and benefit from the second option on your insurance programme.