Many policyholders only check their insurance requirements every 12 months, usually prior to the renewal of their policies. Previously, an annual review was generally considered adequate for most businesses. However, given the current economic climate, there are several factors that could significantly affect how insurance policies respond to an insured event.
COVID-19 and the war in the Ukraine, along with other global and local economic factors, continue to impact a multitude of industries and the sectors that support them. Delays with manufacturing, labour shortages and increased commodity prices have seen the cost of remediating property losses increase exponentially.
With this in mind, we recommend you carefully consider and review your insurance requirements outside of the ‘normal’ 12-month cycle, giving particular emphasis to property sums insured. Furthermore, consideration should also be given to lead times for specialised materials and machinery due to global supply chain issues.
Protect against under-insurance – it’s a false economy otherwise
Deliberately under-insuring your assets is a risk few can afford to take. While some may be tempted to risk nominating lower sums insured to save on the premium, in the event of a claim – especially one involving a total loss – that decision is likely to be a false economy.
For others, under-insurance is unintentional and stems from not working out how much is really needed to cover potential losses, for example by underestimating rebuilding costs (with demolition) or the replacement value of assets. The Insurance Council of Australia (ICA) estimates that more than 80% of Australians are under-insured on their properties.
In light of current economic and insurance market conditions, it is important that you check that your sums insured reflect today’s costs and risks. It is also prudent to review and update expected reinstatement periods for tangible assets to reflect changes in supply chains and prices. Doing this will help reduce the risk of under- and over-insurance should a claim arise.
Volatile economic conditions
The last couple of years have been tumultuous for economies around the globe. Insurance is not immune from macro and micro economic factors and the prevailing conditions can greatly influence the availability and cost of covers. These factors can also have a significant impact on the policies you currently have (or are seeking), and particularly property insurances.
For example:
- Construction costs
According to the Cordell Construction Cost Index, residential construction costs increased by 11.0% over the 12 months to September 2022 – the highest annual growth rate outside of the introduction of the GST. Construction costs have risen 20% over the past 18 months. This has a direct impact on the cost to repair or re-build a property. - Cost of building materials
The cost of materials continues to rise. Timber, board and joinery, as well as steel products, have risen the most. In 2022, steel products increased by 42.1%, plastic piping by 26.0%, timber, board and joinery by 20.6%, other metal products by 16.2%, glass and mirrors by 14.1%, electrical equipment by 13.9%, ceramic products by 12.6%, plumbing products by 11.5%, cement products by 7.1%, concrete, cement and sand by 3.4%, and installed gas and electric appliances by 2.8% (ABS data, March 2022). A recent building boom in the US has also made it difficult for Australian builders to compete for supplies from China, the source of most construction materials. This adds substantially to the cost of repairs and building – for example, it costs $76,000 more to build an average home in 2022 than it did a year prior. - Availability of building materials
Many of the materials needed for building are hard to source. In particular, timber and steel are in short supply. Recent bushfires and floods have decimated local timber supplies, while the war in Ukraine has impacted imported steel shipments. This has led to cost increases and building delays. - Labour shortages
Record low unemployment (3.4% in October 2022 – the lowest rate since 1974) has added to skilled and unskilled labour shortages. Within the building industry, the labour shortages are acute – the HIA Trades Availability Index indicates the industry is experiencing the most significant skills shortage in two decades. As a result, Australia is the world’s fourth most costly region for labour (International Construction Market Survey). This flows through to the costs to repair damaged property or rebuild. - Supply chain disruptions
Global and local disruptions to transport routes have impacted the availability of goods. Supply chain disruptions have made imported goods harder to obtain and seen delivery times blow out. In addition, freight costs have risen. For example, shipping containers cost four times as much as they did a few years ago. The result is higher prices for goods, so the replacement costs are higher. - Inflation
CPI is hovering around 7% and is expected to peak at around 8% in Q4 2022. In October 2022, the most significant contributor to the annual rise was new dwellings (+20.4%) which was attributed to ongoing shortages of labour and materials. Increased fuel and utility costs also have a flow-on impact on the cost of goods. Global commodity prices are also being driven up by inflation. Rising inflation erodes the value of insurance covers. - Spate of natural disasters
Extreme weather events have exacerbated construction cost rises, by increasing demand for both materials and labour. These events add to repair and replacement costs, especially in affected areas. - Rising interest rates
The RBA has been lifting the official cash rate since May 2022, taking rates to the highest level in a decade. This impacts the cost of property financed, which flows through to the insured sums. - Limited availability of property/assets
For example, the price of new and used vehicles, and machinery, has increased dramatically due to short supply and long delivery times. Global shortages of raw materials needed to produce goods such as computer chips and furniture has also seen availability decline and prices increase. As a result, the replacement costs of many goods and assets are now much higher. - Ongoing impacts of COVID-19
The production and distribution of goods continues to be hindered by the fallout from the global pandemic. In particular, lockdowns in China have had a major impact on the global supply of raw materials and numerous goods central to business operations and commonly found in homes – from paper to furniture and computers. This results in increased prices and longer delivery times, which can erode the value of sums insured. - War in the Ukraine
Availability of commodities including metal and minerals, energy and fertilisers, have been affected by the Russian invasion of the Ukraine as production has been affected, along with disruptions to trade at ports. As a result, there is short supply and global prices have increased significantly. In addition, sanctions against Russia have impacted the pricing of commodities such as oil, gas and coal – driving up prices. Again, this can erode the value of sums insured.
Based on these factors, it will cost significantly more to rebuild premises (e.g. shop, office, shed, home) or replace contents (home, business goods or stock-on-hand) after damage or total loss from an insured event.
Calculating sums insured
Tips to determine your sums insured are adequate:
- Base the sum on the cost of replacing your premises and contents on a new-for-old basis.
- Do not base the building sum on its market value.
- Do not rely on the property valuation provided by your bank, as these valuations tend to be conservative.
- Engage a quantity surveyor to determine re-building costs.
- If using an online calculator, be mindful that all the cost variables are accounted for (see below). There are numerous calculators available and the ICA provides a link to CoreLogic’s Cordell Sum Sure calculator on its website.
- Ensure the calculations are based on current building costs – prices for materials and labour have increased significantly.
- Do not include the cost of the land, just the property/structures built on it.
- Make sure you allow for current building standards to be implemented – risk mitigation requirements, such as bushfire, cyclone or flood protections, can add substantially to re-build costs.
- Factor in structural improvements that have been made to the property, like sheds, decking and fencing.
- Include the cost of removing debris.
- Include the cost of engaging an architect, and council fees.
- Be sure to have cover for contents, not just the building.
- Do not base the sums on the value of assets in the balance sheet – these figures will factor in depreciation (written down value) and are not an accurate representation of the actual cost to replace them at the time of a loss.
- Use a quantity surveyor to complete a valuation for higher value or bespoke assets to help determine the full replacement value.
- Be sure the sums are adequate to cover the number and value of assets, especially if contents have been added, replaced or upgraded with better quality and more expensive items.
- Include GST.
- Factor in inflation and exchange rates.
Mid-term review
As economic and market conditions evolve, it is prudent to review the insured amounts to be confident that they continue to adequately cover the value of your property assets (home and contents, business premises and stock).
We encourage you to undertake a mid-term review:
- Identify the risks to your property – from physical risks (flood, bushfire, crime rate) to financial and reputational risks.
- Discuss risk mitigation strategies including transferring risks to insurers.
- Consider policy options including features, coverage, claim limits, excesses and premiums (some covers may no longer be available or cover the same risks or at the same levels, while some premiums may have risen significantly).
- Ensure you know and understand policy inclusions and exclusions (what the policy does and does not cover, and in what circumstances).
- Confirm you are meeting your requirements under cover i.e. contract terms and conditions (including disclosure).
- For business owners: Ensure your business inventory and valuations are up-to-date and reflect current costs.
- Engage a quantity surveyor to determine premises replacement costs.
- Check sums insured and limits of liability reflect values and risks.
- Be sure to tell your EBM Account Manager about any changes to your circumstances as your insurer(s) must be advised or you could risk any payout being reduced, claim denied, or the contract cancelled.
- Talk with your EBM Account Manager to get an understanding about what is happening in the insurance marketplace. In general, the property insurance market remains hard (which is characterised by higher premiums, reduced capacity, reduced coverage, increased excesses, tighter risk profiles, more stringent underwriting criteria, and expectations of continuous and improved risk management). It’s important to be aware of how insurers are operating as you may find there is no longer any ‘wriggle room’ and your insurer won’t be able to help if you have nominated an inadequate sum insured.
We are here to help
As you renew your policies, or look for additional insurance coverage, your EBM Account Manager will help you secure the products you need with realistic sums insured based on current market conditions and a suitable contingency.
Your EBM Account Manager has the expertise and resources to guide you through the assessment process and help you protect your assets. If you have any questions, please contact your EBM Account Manager on 1300 755 112.
