High cost insurance pushes business to the edge

The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell has found the insurance industry is gouging small business owners on essential business products.

The ombudsman has handed down her Insurance Inquiry final report and has gone so far as to suggest the insurance industry is ruining the small business sector. Carnell says there is widespread market failure regarding the availability and affordability of products.

Crippling cost of insurance

“Our Insurance Inquiry has revealed we are in the grip of a national crisis that is killing small businesses,” Carnell says.

“The local insurance market has been hardening for years as insurers adapt their risk weightings to increasing threats. As a result, far too many Australian small businesses are on the brink of collapse because they cannot secure a range of insurance products necessary for their operation.”

Carnell’s Inquiry found an overwhelming number of small businesses been denied insurance outright or their premiums have as much as tripled in just a few years, effectively pricing them out of the market.

“We’ve had an overwhelming response from the small business community, many of whom told us that insurance is one of their largest expenses and a lot are under-insured.

“Hundreds of small businesses have told my office they face closure if insurance remains unavailable to them. In reality, it means thousands of small businesses are likely impacted and there could be dire consequences for the Australian economy if left unaddressed.”

Calls to expand Australian Reinsurance Pool Corporation

The ombudsman’s report recommends a series of checks and balances to readdress the risks taken on by insurers and make small business insurance products more accessible. A major recommendation included in the report is to expand the Australian Reinsurance Pool Corporation to provide reinsurance for all natural disasters on commercial property insurance.

“Following the devastating bushfires we saw earlier this year, many small businesses are struggling to get insurance for natural disasters. This is severely impacting small businesses such as rural pubs and regional accommodation businesses that say natural disaster coverage is inaccessible, extraordinarily costly or they have been refused coverage outright.

“In the wake of the September 11 terrorist attack in the US, the government set up the Australian Reinsurance Pool Corporation, in response to a withdrawal of terrorism insurance by insurers and reinsurers.

“This should be expanded to cover small businesses in the event of a significant natural disaster by providing a vital increase in reinsurance options for commercial insurers.”

Code of Practice needed

Carnell says it was also time the industry had a mandatory Code of Practice and a regulator, as self-regulation has failed. Her report recommends Australian Financial Complaints Authority (AFCA) be given additional powers to deliver dispute resolution and enforcement.

“As it stands the insurance industry’s service and practice standards are set by voluntary codes of practice that are rarely enforced and not taken seriously by the industry.”

The ombudsman also suggests that obtaining ongoing public liability insurance has also become an issue for small businesses.

“Public liability insurance has become almost impossible for small businesses to obtain, particularly those that offer recreational activities such as caravan parks, quad bike tours or jet boating to name a few,” Carnell says.

“Our report recommends Australia follow the lead of New Zealand, which has applied statutory caps on liability for personal injury. The risk environment for public liability litigation can only change through government intervention and the current framework of fault-based injury compensation creates uncontrollable risks for insurers and small businesses. It’s clear we need a civil liability framework that actually works.

Carnell said many small businesses had reported misconduct from insurers with most common complaints including late notice of renewal terms and price hikes.

“For a significant number of small businesses, insurance has become a daily stressor and a major reason for considering closure.

“Ultimately insurance is a necessity for small businesses to operate, which is why it is vital these products are fit-for-purpose and accessible so they are protected when things go wrong,” Carnell concluded.

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