Inflation’s impact on the business sector
Rising inflation has created ongoing ripple effects through all parts of the Australian economy. The rising cost of raw materials and labour to produce goods and services continues to impact the supply chain, with the flow-on effects impacting customers already on tight budgets.
Household spending has dropped significantly as homeowners and renters tighten their belts, contributing towards lower revenues and sluggish economic growth. At the time of writing this report, Australia’s economic growth had slowed down to below 2.5% per annum and is expected to remain subdued for the next 18+ months. This is due to the fastest RBA tightening of monetary policy in decades - a response to the elevated level of inflation experienced in the economy, driving a much slower and weaker than expected post-pandemic recovery. Analysts predict further interest rate rises, which, combined with lagging consumer confidence, suggests the weak economic environment will persist well into 2024.
Although the latest forecast from the RBA and OECD statistics indicates Australia’s inflation rate may ease to 2 – 3% in the next 18 – 24 months, this is cold comfort for insureds who are likely to keep reassessing insurance coverage and sums insured to save costs, further highlighting the very real risk of underinsurance.
Regularly reassessing sums insured for domestic and commercial property risks has always been significant, but it is now a fundamental conversation between brokers and Insureds in a high inflationary environment. Relying on inflation triggers in policy wordings may be insufficient. Especially for commercial properties, conducting regular valuations at least every three years may assist Insureds in safeguarding against the risk of underinsurance.
In addition, observing risk management and mitigation recommendations on properties can help Insureds to not only avoid preventable claims from occurring but also present more attractive new business and renewal risks to underwriters.
This message is gaining traction in the Property ISR (Industrial Special Risk) space. We have seen post-valuation sums insured having increased on average by 8.18% between June 2022 to June 2023. Conversely, we have not seen the level of increase in SME customers revising their property sums insured. This may be to avoid premium increases that strain already tight operating margins. We are also seeing a ‘set and forget’ behaviour where sums insured are not increased at renewal, with a lack of movement not reflecting changing inflation. An emerging trend is also a shortage of accredited valuers in the market to meet the demand for valuations, creating a gap of about 12 months to pick up the Insureds who have not yet taken up a property valuation in the past three years.
Businesses and their operations are unique, and business interruption is not a ‘one size fits all’ cover. Choosing the appropriate coverage structure provides flexibility to protect a businesses’ income by considering earning patterns and fixed costs. This can set a lower sum insured that still provides the level of protection without the insured being charged for expenses they do not require cover for.
Within SME, the take-up of business interruption cover has been historically low. It can be perceived as an extra expense on top of a business insurance policy, with customers lacking understanding of the potential loss scenarios (including contingent interruptions to their business) that can severely impact their ability to trade. With increasing frequency of natural perils, labour shortages, and a high inflationary environment, businesses should consider extending their business interruption coverage. In the event of a claim, these factors may influence the length of time required to complete repairs.
Observing risk management and mitigation recommendations on properties can not only help insureds to avoid preventable claims from occurring, but also present their new business and renewal risks in a more attractive light to the underwriters who consider them.
