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Insurance complexities for businesses

Navigating these factors affecting business insurance cover, cost and availability in 2023 calls for businesses to build resilience by mitigating risks through proactively managing their potential impacts.

19 January, 2023
Article, Insurance, Risk Management, Partners
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In the last 12 months, Australia has learned to live with COVID-19 as 4 rounds of vaccinations have been released and isolation restrictions lifted in the interests of our economic wellbeing, but the pandemic continues both here and overseas, and the disruptions are ongoing. At the same time, the climate crisis has manifested in further extreme weather events, namely extensive flooding in some low-lying regions, affecting entire communities, and the war in Ukraine has brought other impacts to global markets.

Taken holistically these influences have had a cascade effect, compounding each other and spreading across multiple aspects of societies around the world. In reviewing the year in hindsight we unpack the key factors and look at a couple of areas that have been particularly affected in Australia, as highlighted in our insurance partner CGU's retrospective The Strive Report.

Australia's rapid economic recovery has led to inflation

To prevent the country falling into a major depression as a result of COVID-19 lockdowns the federal and state governments introduced fiscal support measures for businesses and individuals, and spending on infrastructure projects to prop up the economy. The Reserve Bank also reduced interest rates to record lows to take the pressure off borrowers and stimulate investment, while those who could afford to funnelled money into savings.

As restrictions were lifted parts of the economy — notably the property market — roared into recovery while other factors such as delays in supply chains, a La Nina weather pattern and stricter border controls put limitations on goods, materials and labour in short supply, while the Russia-Ukraine conflict inflicted a choke hold on energy accessibility, pushing fuel and power prices to unprecedented levels. The knock-on effect has been higher costs of producing and transporting goods: international freight costs have effectively doubled with the increases passed on to consumers the world over.

In Australia the costs of food, fuel and housing — non-discretionary needs — have risen sharply while wages have remained in decade-long stagnation, creating social and economic inflation not seen since the early 1990s. For property owners the remediation or replacement cost of their assets no longer matches their sums insured, and this is exacerbated by other factors in play.

Climate change impacts and extreme weather events

Climate change impacts are now undeniable, with extreme weather events increasing in strength and intensity, and predicted to increase in projected modelling for low, medium and high atmosphere carbon emissions. Aside from the economic effects of widespread crop failures and the disruption to micro-economies through the destruction of towns and communities, this is affecting insurance availability and pricing, with cover becoming prohibitively expensive in some areas.

Without urgent action and investment in disaster mitigation measures, more stringent planning and construction codes Australians will be increasingly affected by the social and economic impacts of fire, flood and extreme natural disasters. In this environment property owners may be underinsured or completely exposed to climate change risks. This is especially true for small businesses, which represent the majority of the country's employers and are the most vulnerable to loss and inability to maintain trading.

Parametric insurance, which offers highly localised cover and is triggered by specific quantifiable conditions such as temperature, rainfall and water levels, may offer an insurance solution. Already used for specific crop cover, other applications are being developed currently.

COVID-19 and its effect on workplace health and safety

While the restrictions have ended, COVID-19 remains the biggest killer of people in Australia and abroad, and thousands continue to be infected every day. What this means for businesses is a fluctuating workforce and new pressures on workers' compensation schemes.

Working from home arrangements enable some protection and continuity but raise new issues around what constitutes becoming ill while working. Employers remain responsible for worker health and safety, even when they are away from the workplace, and this can involve some grey areas in regard to injuries sustained while working but due to factors outside the business's control.

In response to the stress and uncertainty of the last few years there has also been a marked increase in psychological injury claims. While this may be due to increased openness about mental illness it opens up further questions about employer responsibility and highlights the importance of documented work health and safety protocols covering training, inductions, incident reporting and records of responses to psychosocial issues raised in the workplace. These types of records may prove critical to the outcome of a psychosocial injury claim.

Construction sector supply chain issues and costs

With disruptions to manufacturing and ports in China, and difficulty in sourcing containers to ship goods, building materials have become harder to source and more expensive to import. In the 12 months to June 2022, Core Logic's Construction Price Index identified a 10% annual increase in building costs across the board, while the price of timber has increased by 20% over the same period.

At the same time, border closures and health restrictions have limited entry into Australia, compounding the shortage of skilled trades and reducing the labour market.

This has resulted in a price spike in construction and building renovations, including restoration or remediation of properties damaged by extreme weather events. At the same time, scarcity and the need to wait for materials have pushed out construction completion times.

This has significant implications for property insurance: the cost of rebuilding may be considerably greater than the sum insured and for businesses the nominated business interruption indemnity period may also be inadequate for current conditions. Some insurers may offer cash settlement instead of restitution and in these cases, property owners should scrutinise the amount carefully in terms of its adequacy.

Pricing trends in the vehicle insurance market

In the face of pandemic uncertainty, Australians' discretionary spending slowed as people saved their money as a buffer against unknown challenges. Sales of new cars fell, not only in Australia but across the world, and this combined with delays caused by COVID-19 led to slowing in the production of new cars. With a wait time of 12‒18 months for a new car, demand for used cars rose and prices followed, especially for utes and vehicles used for outdoor recreation. Between 2020 and 2022 Moody's Analytics recorded a 50% increase in used vehicle prices.

A secondary effect was a concurrent slowing in importing spare parts for vehicle repairs, adding to the pressure on the car market and servicing sector. As this applies to vehicle insurance and repairs there may be distinct advantages to working with the insurer's preferred workshops.

Under these conditions, businesses with insured fleets may find they underinsured for the actual cost of repairs so this is another area where a fresh review is strongly advisable.

Moving forward on business insurance cover

With expertise across a broad range of industries and business specialisms, Gallagher brokers can help advise on the risks and suitable options for business insurance for enterprises of every size. We also offer guidance and resources for building business resilience by mitigating risks through proactively managing their potential impacts.