Australia, like most world economies, is facing record levels of inflation owing to the compounding impacts of the COVID-19 pandemic, disrupted supply chains, the surge in energy prices and severe weather and climate change events. Recently, the Australian Bureau of Statistics reported the annual Australian inflation rate at 6.1 percent – the highest since 1990.
Inflation is not only affecting the cost of living, but it is also putting businesses in Australia at risk by making the values and conditions in existing insurance covers outdated.
In one of my previous articles, I explained how businesses in Australia can combat volatile premium prices through captive insurance but to brace for record-high inflation, businesses need to be ready.
How inflation affects commercial insurance:
Learning from the past
During prolonged inflation in the 1970s and 1980s, insurers saw major losses and policyholders were faced with multiple coverage challenges. The industry saw weaker underwriting performance and unpredictable claim trends.
However, today, the insurance industry in Australia is better positioned with financial reporting advancements providing insurers with capabilities to identify and respond to loss trends. Having said that, the current inflation spike could eventually threaten the long-term stability of the industry’s reserve levels and underwriting profitability.
Impacts on the commercial property market
The commercial property insurance market is suffering due to inflation in repair and rebuild costs, as well as a shortage of construction workers. In these circumstances, businesses in Australia should be ready for a potential increase in premium expenses and other coverage restrictions.
It will be vital to reevaluate existing policies for underinsurance concerns. Being underinsured for assets is a growing concern for businesses throughout Australia. If you are curious to learn more about how being underinsured can affect your business, check out this blog post.
Impacts on the commercial auto industry
The commercial auto industry is also heavily affected by surging repairs and claims, supply chain disruptions and worker shortages. According to data from the National Skills Commission, more than 40 percent of technician and trade occupations are currently in shortage, compared to an overall 19 percent shortage across all assessed occupations.
Furthermore, increasing accident frequency and severity are costing businesses higher medical expenses. These conditions could eventually lead to underwriting losses and impact policyholders with higher premium expenses and coverage restrictions.
The commercial property and auto industries are just two examples of several industries affected by inflation; further, the issues faced in commercial real estate and transport can have significant flow on effects on businesses Australia wide.
Whatever industry you’re in, the strategies below may help you manage the impacts of inflation.
How to mitigate the impacts of inflation
When the business landscape is faced with a rising inflation environment, one of the best ways to mitigate risks is by reassessing insurance cover. To balance essential protection against the budget, businesses in Australia need to reassess their insurance cover in terms of
- adequacy
- cost of repairs
- the actual cost of the cover
It is also important to keep the areas that need re-assessing amidst inflation risks. Here’s a quick checklist:
| Areas | Things to remember | Questions to ask |
| Coverage terms and conditions, especially any exclusions. | Verify your policy limits and potential sub-limits |
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| Adequacy of cover and sums insured | Reassessing your sums insured will help check the adequacy |
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| Cost and availability of materials and labour | Crucial for property, motor and business interruption claims |
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| Property valuations | Confirm your current policy will cover recovery expenses after a loss in view of current property repair and rebuilding cost inflation. |
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Create and maintain a robust risk management strategy
It is crucial to create and maintain a robust risk management strategy for your business. While this becomes pertinent in the current economic climate, it should be standard practice for all businesses at all times.
However, during rising inflation and increasingly volatile global economic scenarios, documenting your company’s risk management protocols across operational and management areas may help contain premium costs. For a more holistic approach toward developing a strategy to mitigate the impacts of inflation on commercial insurance in Australia, it would be best to seek professional guidance.
Contact us today if you are keen on having an open conversation to see how we can help you brace your business in Australia for the impacts of inflation and rising premiums.
This article was written by Tony Venning,
Managing Director at Crucial Insurance and Risk Advisors.
For further information or comment please email info@crucialinsurance.com.au.
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