Businesses should always monitor the price of insurance premiums. But why are they rising now if the official interest rate is low and the consumer price index was just 1.1% at the end of the March quarter?
Premiums under the magnifying glass
Premiums – what you pay for insurance cover – usually rise because claims costs have gone up, not only your own claims but other customers claims as well. In short, the premiums of the many funds are the claims of a few.
Ideally, insurers like their claims costs to be between 60% and 65% of the premiums they collect, so they can pay their bills and make a profit. It works out at about 30% of premiums.
Other factors that cause higher premiums from individual to societal levels include:
- A business wanting a higher level of coverage, such as if it expanded product lines or services, fleet or opted for extra covers
- The policyholder asking for a lower excess to apply on their cover or a change in the value or quantity in what’s being insured
- An increase in natural disasters, such as bushfires, floods, and cyclones, add to insurers’ risks
- Insurers looking more closely at policyholders’ records for environmental, social, and corporate governance
- Urban sprawl changing demographics, crime rates, etc
- More expensive and frequent losses, such as in ransomware for Cyber insurance and Class actions for Directors & Officers insurance
- Insurers’ reassessment of a business’ or individual’s risk, particularly after a claim or natural disaster or changes to the external environment such as new regulations
- More claims lodged in that insurance industry sector
- Insurers’ poor returns on their investment
- The cost of global reinsurance
Your premium also includes stamp duties and levies that go to state and territory agencies, as well as the Goods and Services Tax. There are also global trends to take into account.
The global picture
Insurers don’t work in isolation. These companies buy reinsurance – insurance for insurers – to transfer risk. Most insurers buy reinsurance globally, so what’s happening elsewhere affects what’s offered in the Australian market. When the reinsurance market experiences losses, these prices rise, the extra costs flow to premiums. Consider that low-interest rates mean low returns on insurers’ and reinsurers’ investments. As well, insurers globally have been running at a loss for about six years and will need better performance before premiums can dip again. The entire insurance industry had massive losses thanks to COVID-19, and it’s led to less ‘capacity’ for policies on offer.
However, on a high note, the pandemic has shifted a paradigm. The de facto social policy in developed countries saw the responsibility for financial risks due to job loss, illness, or longevity partially move from governments to businesses and individuals. Thanks to COVID, governments such as in Australia are proving their mettle as last resort risk-takers.
Do these to shrink your premiums
But there’s still plenty of risks in the mix for Australian businesses.
Here’s how to manage your risks of rising premiums through these handy tips:
- Consider if agreeing to a higher excess on your policy is a good move
- Actively lower your risk profile by checking you’re doing as much as you can to protect your assets. Strategies such as up-to-date business continuity planning, asset valuations, and business interruption calculations
- Collect better quality data and evidence to better arm us in finding a policy package for you
- Could you retain more risk on your own balance sheet? We can help you with risk finance optimisation, loss modelling, and risk-tolerance analysis to help you work that out
- Get strategic and investigate alternative risk solutions. They include discretionary trusts, protected cell captives, or single-parent captives, which allow businesses to retain risk over the long term financially and operationally
- Ensure you don’t over or underinsure limits or declare values for your business
- Ask us if you qualify for discounts such as through a multi-policy discount or not having made claims
- Pay your premium monthly or quarterly rather than annually, which may assist to manage cash flow
- Review your policies with us to find out how you can further reduce the risks in your business and secure better-fit policies.
So, there’s no simple answer to why your premiums are rising, but we hope we’ve demystified some of the factors that may come into play.
Contact us if you need any help from us on +613 9854 8378.
