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What is the small business insurance crisis?

Many small and family businesses say their biggest and most pressing cost pressure is not wages, energy or even landlords putting up the rent; it’s insurance, writes Small Business and Family Enterprise Ombudsman Bruce Billson.

Finding adequate insurance cover at commercially viable terms is fast becoming a wicked challenge that is, sadly, in too many cases, forcing small businesses out of business.

Unlike households who – for many reasons – might choose to be uninsured or under-insured and have options about the level and nature of the risk protection policies they subscribe to, a small business must have insurance covering areas such as public liability.

If a small business isn’t insured, it cannot engage in trade and commerce.

Insurance an increasing issue for small businesses

There have been countless examples of small businesses closing down because they either can’t get the insurance they need, or when it is available, they can’t afford the prohibitively ridiculous premiums on offer, which in some cases have risen by 200 per cent. Eye-watering excesses and a growing list of exclusions often accompany ‘take it or leave it’ insurance products.

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Live entertainment and music venues have been heavily affected by the lack of suitable insurance cover to continue what they have been doing for decades. While small professional services firms face skyrocketing insurance costs despite making no claims.

Just recently, our office was contacted by an indoor gym and rock climbing business in Western Australia that closed its doors after it was no longer able to buy appropriate liability insurance cover.

In the amusement, leisure and recreation sector, the insurance crisis is so dire that we were asked to look at an alternative model, known as a Discretionary Mutual Fund.

Why a Discretionary Mutual Fund is needed

Our report called The Show Must Go On and subsequent further research and reports backed the creation of a DMF to prevent forced closures, job losses, and a reduction in activity that is important to livelihoods and communities, particularly in the regions.

Crucially, a DMF would be able to impose conditions of entry standards for members and enforce strong risk-management culture and procedures, reducing the likelihood of accidents.

Two years on, it is disappointing that our major recommendations, including initial government support to set up a DMF, have not been embraced.

We’re currently seeing floods and storms devastate some small businesses. The insurance sector can do more to be clear about what is and is not covered. Despite reassuring advertising, complaints to regulators about claims being denied and a lack of responsiveness by insurers remain high.

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There was a rise in the number of insurance issues after the 2020 bushfires, mainly regarding property and related public liability insurance policies, and again as a result of COVID owing to business interruption issues.

Small business and natural disasters

In 2022, we conducted an inquiry into Small Business Natural Disaster Preparedness and Resilience which found that many businesses cannot secure appropriate insurance at an affordable price. If they can get insurance, it can come with excesses that would preclude any claim ever being made.

Frustratingly, insurers are also uninterested in the steps individual small and family businesses take to mitigate disaster risk, or dismissive of them. We have examples of individual businesses doing everything they can possibly do but it has zero impact on the availability and the pricing of their premiums.

We’re told this is because the insurance companies look at risk across a broader pool – it is community-wide or industry-wide or neighbourhood-wide analysis. Yet the narrative, again amplified through advertising, is often about what individuals might do.

Well, many small and family businesses are individually doing what’s being asked of them but are seeing no upside to pricing premiums and availability and affordability of insurance cover. What might be for some an insurance ‘gap’ is too often a ‘gorge’ for small business that too many can’t cross.

A global insurance crisis

The insurance sector has explained the problem is a global one, described as a hardening of the market which means capital is scarce, reinsurance is difficult to obtain and risk appetites are low. In its 2022 annual report the Insurance Council of Australia indicated it would be a priority to address the availability and affordability of insurance.

More than a year ago, the regulator APRA urged the insurance industry to invest in ‘simplification across products, systems and processes’.

Now, I’m pleading with the insurance sector to help small businesses by mapping out pathways to solutions to give small business owners the chance to stay in business. Urgent and decisive action is needed to ensure that essential insurance for small businesses are understandable, accessible and affordable.

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