As New Zealand’s small businesses emerge from two years of sporadic lockdowns and restrictions on trade, many may now be at risk of not having adequate insurance in place.
The environment is ripe for small business owners being underinsured – where the cost of a major loss exceeds the sum covered by the insurer – and they may need to be on high alert to not get caught out.
“Insurance is not a set-and-forget product. It covers the risk of what a business faces, which is constantly changing,” says Jane Mason, Head of Product, Channels & Risk for SME insurance platform BizCover.
“The pandemic and climate change combined with the rising cost of living have changed the operating landscape for many businesses, and with it, the amount of risk they take on.”
Thief of your cover
With inflation sitting at a 30-year high in December and is set to rise even further, New Zealanders acutely understand the rising cost of their breadbasket.
But perhaps what is less understood among small business owners is that the thief in their wallet is also eroding their insurance cover too.
“While we don’t have detailed statistics on underinsurance, it’s clear from when we have major claims events that, while the number of SMEs insured is high, they are often underinsured,” says a spokesperson for the Insurance Council of New Zealand (ICNZ).
“Our members saw an increase in commercial fire losses in 2021. While at ICNZ we do not know the specifics of the insurance coverages for those affected property owners, we do know that recent high levels of building cost inflation can mean that previously set insurance values may not be enough for 2022.”
The pandemic has exacerbated the problem, as the economic fallout puts pressure on global supply chains, slowing down production and pushing up costs across the economy.
Government statistics show the main driver of inflation was the construction of new houses, which rose 16% in a year. This has had an effect on the cost of repairs, which is needed in the event of a claim.
“What all this means for small businesses is the cost of replacement stock, machinery or specialist equipment has, in many cases, gone up beyond what they were originally insured for,” says Mason.
“So, if the worse were to happen and you had to make a claim, you and your business could wind up with not enough insurance to cover the new, higher cost… leaving you and your inflation-ridden bank account to foot the bill.”
Be wary of underinsurance clauses
Another reason for small business owners to consider whether they are suitably insured is that many insurers contain a penalty-type clause in their policies in an effort to discourage underinsurance.
These clauses allow insurers to reduce the amount they must pay when a claim arises, usually in proportion to the amount of underinsurance. This occurs even if the claim falls within the insured amount.
For example, say you insured your business in 2020 for $200k but its true value today is $320k. A storm rips through your store causing $80k in damages and you make a claim. The insurer will essentially divide how much you have insured against what it’s actually worth, and then multiply it by the cost of the claim.
After some quick maths, you will arrive at the sum the insurer will cover – $50k in this case. The rest is on you. That is $30k you would have to cover. And for some, that is simply too much to bear.
What can SMEs do?
Fortunately, it doesn’t take much for New Zealand small business owners to protect themselves from the underinsurance trap.
Mason says setting some time aside every couple of months to understand the true value of your building and business contents and keeping track of your purchases is a low effort way of making sure your business is adequately insured.
“While renewal is a great time to review your cover, you can check any time with your insurer that you are adequately insured. If you need new cover, then jump online and compare at BizCover and we can help you avoid the underinsurance trap along your business journey.”
*This information is general only and does not take into account your objectives, financial situation or needs. It should not be relied upon as advice. As with any insurance, cover will be subject to the terms, conditions and exclusions contained in the policy wording.
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