How inflation impacts your business insurance premium
The last few years have been tough for small business owners across Australia. As we emerge from almost three years of lockdowns and restrictions, most of us are feeling the effects of inflation at the supermarket, the service station and in our monthly mortgage repayments as the cost of living continues to rise. Inflation can also affect our insurance premiums – personal and business – as many people are discovering.
But why does inflation have such an effect on small business insurance and what can we do to reduce the impact?
What is inflation?
Inflation is a rise in prices over a period of time and is generally reflected as a percentage. Basically it means that what you could buy with, for example, ten dollars a year ago is different to what you could buy with the same ten dollars today.
Why does inflation affect everything I buy?
As a modern society, we buy and use a range of goods and services, of which insurance is just one. Everything we pay for, like meat and veggies, petrol, gas and electricity – even our entertainment – is impacted by inflation. Add in external pressures such as ongoing global supply chain issues, and the effects are felt even more keenly.
The rising cost of living doesn’t discriminate — just as the cost of living increases, so do the costs of running a business, including your insurance. And as material and labour costs increase, it becomes more expensive for insurers to repair or replace your insured assets.
Can you be more specific about the type of things impacting my business insurance premium?
We sure can. Just a few of the challenges currently facing the insurance industry and contributing to increased costs include the following:
Building material and labour costs have increased
The price of building supplies and other construction materials has spiked due to a lack of availability, making it more expensive to repair and build properties. In the construction sector, supply disruptions relating to raw materials, as well as ongoing labour shortages, are putting upward pressure on property claims. These factors have likely increased your property insurance costs.
The computer chip shortage
If you’re insuring a commercial vehicle, your insurance premiums are affected by many different things, including:
- changes in repair costs
- the availability and costs of parts
- your car’s sum insured, and
- your claims history.
However, it’s a global shortage of computer chips, semiconductors and other vehicle component parts keeping the prices of new and used vehicles historically high. A crucial component of cars built today, fewer available computer chips means more expensive cars and, as the cost of cars rise, so does the cost to repair if an accident occurs.
Auto repair and labour costs have increased
With the computer chip shortage, more people are keeping their old cars on the road longer. And these cars need more repairs. An increase in demand for car parts, together with global supply chain issues, has lead to inflated car part costs. Auto repair shops are also experiencing staffing shortages and increased labour costs, which are also driving up the costs of repairs.
Okay, but why does my business insurance premium increase every year?
Business insurance is usually taken out as an annual policy, meaning it renews each year. And you’re right, it is common for premiums to increase when a policy is renewed. Recent significant natural disasters such as bushfires, cyclones and floods, have increased the cost of cover in many areas across Australia. This may happen even if the area you live or work in hasn’t been affected by recent natural disasters. Premiums may also increase based on the assessed risk of the business or property.
As a small business owner, how can I deal with inflation while making sure I have the cover I need?
Aussie small business owners are a savvy bunch and understand they need to find a way to manage the impacts of inflation on their business insurance premiums.
However, it’s also important to think about how any policy changes will affect your business insurance cover. Here’s a few simple things you can do to reduce your premium.
Choose a higher excess
An excess is the amount you agree to pay if you make a claim for an insurable event. By choosing a higher excess, your premium will be reduced. Before deciding to increase your excess, ask yourself how much you can afford to pay if you need to make a claim for an event covered by your policy.
Review your insurance policy every year
It’s easy to just let your policy rollover but you should carefully review it at renewal, making sure it still fits your needs and current circumstances. Maybe you have extras you don’t need anymore, don’t drive as much or have upgraded your building security.
With the cost of almost everything going up, the temptation to reduce your insurance may be strong. However, it’s important policies including financial protection for assets, like your buildings, equipment, stock and contents still have the right levels of insurance in place.
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Insurance is issued by AAI Limited ABN 48 005 297 807 trading as AAMI Business Insurance. Limits, conditions and exclusions apply. Read the relevant Product Disclosure Statement before buying this insurance. The Target Market Determination is also available.
This advice has been prepared without taking into account your particular objectives, financial situation or needs, so you should consider whether it is appropriate for you before acting on it.
The information is intended to be of a general nature only. We do not accept any legal responsibility for any loss incurred as a result of reliance upon it – please make your own enquiries.