Spoilt for choice – how SMEs can choose the covers they really need
At the end of FY24, there were almost 2.7 million businesses trading in Australia. Of those, more than 93% were small businesses (less than 20 employees) and a further 2.5% were medium-sized businesses (20 to 199 employees). Combined, SMEs made up 99.8% of all Australian businesses, and accounted for around 57% of the nation’s gross GDP.
Despite the number of people employed by SMEs (around 5.2 million in micro and small businesses and another three million in medium-sized enterprises) and the contribution made to the economy, many business owners are putting their livelihoods at risk by not being insured or by being underinsured.
A couple of years ago, the Insurance Council of Australia estimated that 12.8% of small businesses and 24% of sole traders had no insurance. A report from Business Australia also showed that two-thirds of Australian businesses were not adequately insured.
A lack of appropriate insurance can have serious ramifications for a business, should the worst happen. A survey by insurer QBE found nine out of 10 small business owners agreed that an insurance claim had the potential to put them out of business, cause them to lose revenue, or dry up cash flow.
For many SME owners, not having the right insurances is less a matter of choice (deciding to take on the risk themselves) but rather a case of not understanding which covers they really need. There are a lot of cover options available and knowing which are the most suitable can be daunting – and making a mistake can be costly, not just in terms of the premiums being paid but if the wrong cover is taken out and a claim cannot be made. This is where working with an experienced insurance broker can prove invaluable.
Together with your EBM Account Manager, you can determine what risks your business is exposed to and what insurance options there are to mitigate against those risks.
Key considerations include:
- Your business activities and the risks these involve.
It is important that both you and your insurer understand these risks so that the right cover can be selected. It also means that you need to make complete disclosures to your insurer, or risk not being covered.
- Your legal and regulatory obligations.
There are some insurances that are compulsory/mandatory (such as workers compensation or third-party vehicle). Some industries and professions also require you to hold specific insurances before you can operate your business or enter legal contracts (such as professional indemnity or public liability). Be sure to check mandatory requirements for your business and location (there are different requirements in different jurisdictions).
- Your business assets.
To adequately insure your assets against loss or damage, you need to consider what you need or use to conduct your business. This could include business premises, plant and equipment, electronics, office furniture, tools of the trade, and so on. Assets may also include non-physical things such as specialist skills or intellectual property. You also need to look at what risks your assets could be exposed to, such as fire, theft, flood, injury or liability.
There are numerous options for cover available but, for most SMEs, there are five key insurances to consider. Your EBM Account Manager will discuss options specific to your business needs but in general the covers most often required include:
- Business insurance – cover for your property and income.
As a business owner you will want to protect your assets against a range of perils (for example, fire or theft). What you choose to insure will depend on the nature of your business and the specific assets you want to insure, but most businesses will look to protect their business premises (if owned), furniture, machinery, tools, electronics, and stock.
Business insurance can cover your work premises and contents against loss, damage or theft. It is recommended that your assets are insured for the full replacement value, not the purchase price.
In addition, you may also want to consider business interruption (BI) insurance which helps keep the business afloat if an insured event stops your business from operating. It is crucial that the correct indemnity period is selected to ensure the business is covered financially (for example, able to pay rent, wages, and utilities) for the duration that business activity is interrupted.
If you use vehicles for business purposes (whether it is your own private car for attending meetings or an entire fleet of light or heavy vehicles operating 24/7), you may require commercial vehicle insurance also. At a minimum, compulsory third-party insurance is required for each of your company vehicles.
- Public liability insurance – cover to protect third parties.
For some business activities, this type of insurance (protection against public liability damage claims) is compulsory. For other businesses, the question is whether your business has any public liability exposures – that is, is there any risk that a member of the public could be injured because of your business activities? If members of the public have access to your premises or when you are out and about in public in order to conduct your work, there is a risk they could injure themselves or their property could be damaged.
You have a duty of care to keep clients, suppliers and any other visitor to your premises or worksite safe from harm. Any breach of that duty could result in a liability claim against you.
Public and products liability (PPL) insurance is designed to cover the legal costs associated with an injured person or owner of the damaged property bringing a case against your business. Costs covered include incident investigation, legal representation, and settlements or penalty payments. It protects businesses against paying compensation in the event of accidents, injury, or damages caused by their actions or products.
- Professional indemnity insurance – cover for professional service providers.
There is a huge range of occupations that provide professional services including consultants, architects, engineers, accountants, lawyers, healthcare professionals, financial advisors, and surveyors. In fact, of Australia’s 13.8 million-strong workforce, more than 3.5 million are classified as “professionals”. If you provide a professional service to clients, there is a risk of your client being dissatisfied with your service for any number of reasons, for example you provide poor advice, an employee makes a mistake, you overlook something that turns out to be important, or you fail to mention something that your client should have been told. If they feel strongly enough, your client can bring legal action for damages against you.
Professional indemnity (PI) insurance, also known as errors and omissions (E&O) insurance, can provide protection for businesses in professional fields. It provides cover if an allegation or claim is made against you for negligence or breach of duty. This may arise from an act, error or omission in the performance of your professional service or advice. The insurance covers the costs for your legal defence and any damages you may have to pay.
For some professions in Australia, it is a legal requirement to hold PI insurance, or it may be a mandatory part of a professional licence or membership in an industry association. It can also be a contractual requirement. For other professionals, the need for cover will depend on the services provided.
- Workers compensation – cover to protect employees.
While around 63% of SMEs do not have any employees (sole traders), around 28% employ between one and four employees and around 9% employ between five and 19 people.
If a business employs workers on any basis (including voluntary), they must take out workers compensation insurance in case an employee is harmed in any way while performing their work duties.
In some jurisdictions, the cover must be purchased from a mandated insurance provider, while in other states and territories you are free to choose insurer.
It is important to understand that workers compensation insurance is only available to protect an employee of the business, not the owner. If you are a sole trader, talk to your broker about personal insurance options (such as personal accident and sickness insurance) to protect your livelihood.
- Cyber insurance – cover against online risks.
Any business that operates online (and that could be as simple as using email or as complex as multiplatform retailing), is exposed to cyber risks. While many SMEs think they are too small to be targeted by cybercriminals, this is not the case. In fact, SMEs are increasingly the focus of cyberattacks from ransomware to data breaches, scams to fraud. Research from MYOB revealed 73% of SMEs have experienced a cyberattack or cyber incident, while 43% of cyberattacks are aimed at small businesses, according to Accenture’s 2023 Cost of Cybercrime Study. Many SMEs do not have the resources to recover if they fall victim to an attack. For example, in FY23, the average cost of cybercrime in Australia was $46,000 for a small business and $97,200 for a medium-sized business.
Cyber insurance can help financially protect your business from the fallout from a range of cyber incidents including cyber events, cybercrime, and privacy breaches. Cyber coverage can go beyond providing financial protection against potential losses resulting from a cyber incident, it can also include proactive monitoring and remediation services to help identify and stop potential threats to your business.
In many cases, the covers typically needed by SMEs can be bundled into a business pack. This way, key insurances including general property, property damage, theft, BI, and PPL can be combined into one package (with a single premium). There is usually the flexibility to add or subtract policies to customise the package to your specific needs. It should be noted that some covers, such as workers compensation or PI, cannot be included in a business pack bundle.
By working with your EBM Account Manager, you can secure the covers you really need to protect your business.
