We know that life can be unpredictable, and as much as planning and risk management measures are helpful, some things are simply out of our control. Even before the COVID-19 pandemic, the world functions in a way that new challenges and accidents can and will occur due to ever-changing external factors, like the crisis in Ukraine and likely new supply chain disruptions.
When it comes to owning a business and potentially investing in buildings or other property, as well as their contents, the idea of managing all the related risks and insurance can be a little overwhelming.
Commercial property insurance is a package of insurance covers created to allow business owners to take back control of all their insurances, reduce administration and the premium, as well as enable better management of potential catastrophic financial risks from events such as fire, storms and floods.
Despite insurance being both beneficial and essential, a large majority of businesses have increasingly reported difficulty in gaining affordable insurance over the past three years.
Key factors are reflected in high premium growth, reduced cover and more significant excesses include negative interest rates, low investment income and the increasing cost of catastrophic claim losses. These are some of the roadblocks faced by Australian businesses obtaining insurance in recent years. This has resulted in a ‘Hard Market’ in Australia, meaning many higher-risk industries and sectors cannot get affordable insurance.
Even though there is concern about insurance premiums and cover, businesses throughout the Asia Pacific continue to invest in the commercial real estate sector. While this is a massive win for investors and owners, it highlights the need to work with the insurance industry in getting the best outcome.
We see that business practices continue to grow, but purchasing adequate insurance is no longer a top priority due to rising insurance prices. To get back on track and regain control, we need to understand what is fuelling the premium increases and how risks can be managed within this changing landscape.
What is Commercial Property Insurance?
Owning and running your business and assets, including your building, takes time and money.
Commercial property insurance is the best way to protect you and your business financially. This package policy is designed to minimise administration and maximise your insurance dollar. This type of insurance is suitable for buildings with all sorts of occupants, from dentists to hardware stores and retail shops.
A commercial insurance package is designed to help your company to get back to the pre-loss financial position. Understandably, this makes it a valuable investment that can help put your business in an optimal position to bounce back quickly.
It is important to note that Commercial Property Insurance not only covers storm, fire and water damage to the building and contents, it can also cover loss of income following a loss. Other insurance covers usually available include internal and external glass, electronic equipment, machinery breakdown, public and products liability and burglary.
Commercial property insurance may cover theft, earthquakes, explosions, fire, storms, water damage, and vandalism. While these may seem extreme or like they will ‘never happen to you’, the statistical truth shows that they do.
Property Insurance Market Conditions
Commercial property insurance premiums increased 16.5% on average over the past 12 months (KPMG Insights) in Australia; This trend of rising premiums has occurred over the past three years and reflects several factors, including low investment income for insurers with interest rates at historic lows, the rising cost of individual claims, reflecting labour and material costs, also increased fees and frequencies of natural catastrophes such as the current storm flooding in NSW & Queensland. Claims from these storms alone are likely to reach $2 billion.
Unfortunately, premiums are likely to increase again in 2022 by 10% - 15% for a standard commercial risk, without claims or hazards, such as asbestos or EPS. These premium increases will likely continue in 2022 until insurance companies reach profitability.
Properties that are heritage listed, recycling, hostels etc., which are seen as higher risk are likely to continue to find affordable insurance difficult to find or have higher excesses imposed.
How can you keep commercial property premium increases down?
Insurance premiums are based on the insurers' risk to your property, plus administration costs and a margin for profit. So, if you can show that you're managing your risks better, it will be a good basis for talking to your insurer or insurance adviser.
Most businesses, including commercial property owners, have some risk management in place. It may be a good time to get advice from a specialist to get an updated risk survey, analysing how key risks can be controlled or reduced. This can be a basis of premium negotiations with the insurer.
As the property owner, you could choose to retain more risk or invest in risk control. For example, not insuring plate glass, installing monitored smoke/ fire alarms or taking a higher excess will likely reduce the impact of any future premium increases.
Underwriters also consider the following when calculating the premium for each commercial building risk:
- Age of property, is it heritage listed?
- Location, city centre, flood area, bush fire exposed or industrial estate;
- The business occupation of the premises, a chemical factory is a higher risk than an office building;
- Claim history for at least the past five years, also the amount paid and how often you claim;
- Construction & fire protection, hard-wired smoke or heat detections;
- Security, bars, deadlocks, alarms including monitored alarms and;
- Sum insured for the buildings and any contents.
This means that if your property has wood floors, an asbestos roof, or a high-risk tenant, it attracts a higher premium cost. Understanding what drives your insurance costs and an up to date risk management plan will enable you to make informed decisions that can make a difference to your premiums each year.
Other external factors impact insurance pricing, such as bush fires, storms, floods and hail. When purchasing the property, some of these can be managed in a risk management plan by considering the location or reducing bush fire hazards. These are important considerations and should be discussed with your insurance adviser.
The premium increases are anticipated to continue in 2022, although lower than the past three years. However, specific industries and types of risk in hazardous industries, multiple claims or asbestos or wood construction will continue to find it difficult to obtain competitive premiums, excesses and, in some cases, cover.
The Lloyds international insurance market took steps some years ago to remove or reduce unprofitable syndicates and continues to reduce their acceptance of Australian risks, which are seen as an unprofitable business. If premiums are quoted, they are usually higher than Australian based insurers, with large excesses.
Commercial property insurance will remain an essential way to manage larger financial risks despite these challenges. Thinking out of the box or updating risk management planning is critical. Insurance coverage can range significantly from one business to the next, so talking to your trusted local insurance adviser is the best step.
Contact Insurance Advisernet and find your local adviser today, who can help you look at ways to reduce your insurance premiums and provide you with risk management advice and assistance.
This communication including any weblinks or attachments is for information purposes only. It is not a recommendation or opinion, your personal or individual objectives, financial situation or needs have not been taken into account. This communication is not intended to constitute personal advice.
We strongly recommend that you consider the suitability of this information, in respect of your own personal objectives, financial situation and needs before acting on it. This document is also not a Product Disclosure Statement (PDS) or a policy wording, nor is it a summary of a particular product’s features or terms of any insurance product. If you are interested in discussing this information or acquiring an insurance product, you should contact your insurance adviser to obtain and carefully consider any relevant PDS or policy wording before deciding whether to purchase any insurance product.