All of this recent weather-related damage and loss has highlighted some alarming risks in the small-medium business sector. The flow on financial liability to the business owner and subsequent personal loss can be catastrophic.

Insurance Advisernet Australia recently interviewed Allan Manning, Managing Director of the LMI Group, and Keith Till, Manager of Broker Services at Zurich Australia. Both are insurance industry experts passionate about minimizing the risks associated with under insurance.

They share their insights and expertise on a range of insurance issues and the personal financial implications for business owners with under insurance situation.

Question:  
What generally happens to businesses that have suffered a major crisis, caused by a fire, flood, storm or similar catastrophe?

Allan Manning:
A common sentiment amongst business owners when they take out insurance is that they never expect they will have to use it – I call this the “it will never happen to me” syndrome. So when a major crisis or disaster does happen, it is easy to appreciate the enormous amount of shock and stress that this type of event can place on business owners. In the case of most small-medium businesses, the owners invest all or most of their time, effort and finances in their business – the mortgage over the family home and their superannuation scheme are intimately linked. Thus, if the business faces a crisis, there is much more at risk for the owners than `just the business’.

Keith Till:
Much of our information today comes from Allan Manning’s research in 2006, which unfortunately found that approximately 40-50% businesses never re-open after a major crisis. A further 20-30% of businesses fail within the first 12 months after re-opening. And these were healthy businesses with a level of insurance coverage that the business owner felt was adequate.

Question:          
That is a very high failure rate after a catastrophe, what are some of the reasons for these failure rates?

Allan Manning:
There appears a general belief amongst the Australian public that all insurance policies are the same. This is definitely not the case – there is a great level of disparity amongst policies. So when a disaster happens, such as Cyclone Larry in 2006, we found that only one business was correctly and fully insured. The QLD floods highlighted this when many businesses thought they were covered for riverine flooding, but their policies stated quite clearly that they were not.

Keith Till:
With small-medium business, we have quite a high level of under insurance. In 2006, I reviewed our business clientele at Zurich and found that 74% of businesses had not increased their value of sums insured over the last 2-3 years. And yet during that same time period, the CPI has risen by 8%, building costs had risen by 20% and stainless steel products had risen by 50%. I don’t believe that this scenario will be any different in 2011. Not insuring your business for its full value leaves the owner with an unnecessary level of exposure. And when you have to rebuild, business owners have to consider new building regulations that will affect and add cost to reconstruction. Also, business owners need to consider supply availability of builders – much of Australia’s building resources will be redeployed to QLD to rebuild the state after devastating floods and Cyclone Yasi. And what about if various parts and supplies are currently sourced from Japan? It could be some time before those supplies are flowing regularly after their earthquake, tsunami and nuclear disaster.

For all of your insurance neesd or queries, contact Amanda Homann of Insurance Advisernet Australia.