Australia, like many economies and countries worldwide, is facing rising inflation levels due to compounding impacts from recent years of the COVID-19 pandemic, related supply chain challenges, the Russia-Ukraine conflict's effect on the energy market and significant severe weather events and losses. High inflation causes the values and conditions in existing insurance covers to become out of date and, in many cases, insufficient to provide for expected levels of business protection.

An International Monetary Fund report is predicting 5.7% inflation for developed countries over 2022, and 8.7% in emerging economies, already being reported as the highest inflation levels we've experienced in recent decades.

What are the inflation factors that impact business insurance?

Given inflation pushes up the cost of living and the cost of business, the baseline values of business assets and insurance protections become eroded over time. Factoring inflation pressures into business insurance considerations provides for adequate levels of protection in the face of rising costs and the flow-on effect on insurance terms.

For example, a commercial property may be insured for $500 per square metre in potential damages, and if an incident occurred and a claim was made the impact of inflation may result in the cost of repairs for damages being 30% more than previously, and the $500 per square metre insured level being inadequate.

Key areas where inflation erodes the adequacy of business insurance

High inflation has important flow on effects to insurances, such as:

  • Commercial property and contents such as stock on hand — should negative impacts occur, cost of construction, repairs, replacement and restocking will be higher.
  • Plant and equipment — parts, repairs and labour costs, and machinery itself will all become more costly, and if your business equipment is affected your insurance levels may be inadequate, causing the higher costs to fall on your business expense line, should insurance limits be insufficient.
  • Business vehicles and fleets ‒ auto motor industry costs are already high given supply limitations and cost of repairs and replacement vehicles is an elevated cost to consider, especially those that use specialised functions and parts.
  • Professional liability, product liability and directors and officers' liability claims costs — the unknown litigation cost of unresolved cases where settlements are likely to reflect the devaluing dollar is termed 'social inflation'.

How to address inflation impacts to maintain strong business insurance protection

In a rising inflation environment reassessing insurance cover in terms of adequacy, cost of repairs and the actual cost of the cover helps businesses balance essential protection against their budget.

Areas to re-assess business insurance amidst inflation risks include:

  • Review of coverage terms and conditions
  • Your broker should assist with reviewing your current coverage terms and conditions, especially any exclusions. Verify your policy limits and potential sub-limits are adequate to cover a loss. Any underinsurance issues identified can be addressed by updating coverage and purchasing policy endorsements.
  • Re-evaluating adequacy of cover and sums insured
  • Check the adequacy of your business insurance cover by reassessing your sums insured. Outdated valuations could leave you underinsured if expenses exceed your existing coverage limits.
  • Cost and availability of materials and labour are key points to take into account for property, motor and business interruption claims. This may require factoring extra time into indemnity periods, the length of time that the insurance cover for costs applies and your policy may need to be updated to reflect these conditions.

"The best way to address accuracy of sums insured for property cover is to obtain a proper insurance valuation for reinstatement/replacement cost," advises Emma Keegan, Gallagher Head of Strategic Sales Operations — Corporate.

Reassessing property valuations

Verify your commercial property insurance coverage reflects accurate property valuations. Confirm your current policy will cover recovery expenses after a loss in view of current property repair and rebuilding cost inflation. In particular any reliance on accounting valuations for asset repairs or replacement that depend on calculations based on original purchasing cost merit a reality check. Businesses holding inventory of commodities might also need to re-assess the value of their stock.

Cost of remediation and time involved

Recent extreme weather events are putting added pressure on remediation and replacement demands, Keegan notes, so the terms of the policy in determining appropriate deductibles, or excess that your business agrees to cover; aggregate (the maximum sum the insurer pays for all losses claimed over the policy period); and maximum indemnity period levels should be examined closely.

Other potential business liability costs

Other types of insurance involving injury or damage, such as workers' compensation and public and directors and officers' liability, may also be subject to an inflationary effect on the costs involved and the time taken to resolve a legal suit.

Review and enhance your business's risk management strategy

Documenting your business's risk management protocols across both operational and management areas may contribute towards containing premium costs. Obtaining guidance from your broker can assist with ensuring your risk management strategy covers the exposures that insurance underwriters are likely to assess.

Work with your business insurance broker

Your insurance broker can provide invaluable help with ascertaining the sums insured for your business assets are realistic, that deductibles and indemnity periods accurately reflect your needs, and that your insurance program is structured to ensure efficacy in an inflationary climate.They may also advise on purchasing necessary policy endorsements, obtaining a property risk report and adjustments to risk management measures.

Disclaimer

Gallagher provides insurance, risk management and benefits consulting services for clients in response to both known and unknown risk exposures. When providing analysis and recommendations regarding potential insurance coverage, potential claims and/or operational strategy in response to national emergencies (including health crises), we do so from an insurance and/or risk management perspective, and offer broad information about risk mitigation, loss control strategy and potential claim exposures. We have prepared this commentary and other news alerts for general information purposes only and the material is not intended to be, nor should it be interpreted as, legal or client-specific risk management advice. General insurance descriptions contained herein do not include complete insurance policy definitions, terms and/or conditions, and should not be relied on for coverage interpretation. The information may not include current governmental or insurance developments, is provided without knowledge of the individual recipient's industry or specific business or coverage circumstances, and in no way reflects or promises to provide insurance coverage outcomes that only insurance carriers' control.

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