Solving the SME underinsurance problem

By Susan Muldowney | Vol: 40 Issue: 1 | Mar 2017
SME story

There is nothing new about SMEs being underinsured, but there is plenty that is new about how the industry is dealing
with the problem.

The latest corporate insolvencies report1 from the Australian Securities and Investment Commission (ASIC) had insurance professionals shaking their heads in frustration. While small to medium-sized enterprises (SMEs) remained a dominant feature of the 2015–16 ASIC report, which was hardly surprising given they represent 96 per cent of all Australian businesses, inadequate cash flow was a major cause of their failure. With the right insurance, many of them may still be open for business.

Underinsurance among SMEs is nothing new. It’s a topic the Journal addressed almost 30 years ago – and here we are again. However, much has changed across the business landscape in the past three decades and SMEs are now exposed to even greater risks. Increased globalisation has created more need for business travel, workplace health and safety regulations have become more stringent and cyber attacks are now a common threat for businesses of all sizes (see breakout). 

The need for adequate insurance has never been greater. While convincing SMEs of its value remains an ongoing task, key industry players are stepping up to the challenge.


SMEs make up the lion’s share of all Australian businesses. They employ more than 4.5 million people and produce more than AU$330 billion of the nation’s annual fiscal output. Despite their strength, adequate insurance remains a weakness and, in many instances, SMEs are not insured at all. The Insurance Council of Australia’s (ICA) 2015 report on non-insurance in the SME sector showed a non-insurance rate of 12.8 per cent. This is a significant improvement on results from the ICA’s 2007 report, which identified a non-insurance rate of 25.6 per cent within the sector. 

Many SMEs with insurance are not adequately covered for disruption. The latest SME Insurance Index from Vero[2] shows that while 32 per cent of the SMEs surveyed listed the inability to trade as their biggest business concern, around 80 per cent of them do not have business interruption cover, 91 per cent lack cyber insurance and 80 per cent are not covered for machinery or equipment breakdown.

It’s a similar story among SMEs in New Zealand. Underwriting agency DUAL cites[3] that while many of the country’s 450,000 SMEs purchase general liability, employers’ liability and statutory liability insurance, less than 10 per cent have management liability, corporate travel and cyber liability cover.

Emily Winwood, Commercial Manager with DUAL Asia Pacific, says that although SMEs are often required to have insurance such as public liability to satisfy contract conditions or landlord requirements, policies such as management liability are often viewed as a luxury. 

“It’s kind of a catch-22 because the reality is that they do have claims,” Emily states. “If you have a policy in place, it can make the difference between staying in business or being wiped out. I’ve seen many cases over the years where if a client had not had a AU$1,200 management liability policy or a policy to cover an AU$80,000 crime loss, they would have gone under. Most small businesses don’t have AU$80,000 sitting around.”

Anthony Pagano, National Manager, Commercial Intermediaries with Vero, says many SMEs that take out insurance when they start their business fail to upgrade it as they grow and this can also leave them exposed. “Businesses do change over time and SMEs need to reassess that they have the right equipment to do their job. Insurance should be viewed as essential business equipment.”


Allianz is working to make insurance easier for SMEs. Aaron Gavin, National Underwriting Manager, SME and Personal Lines in Allianz’s Broker and Agency Division, says the insurer has just completed a major upgrade of its SME products, which are available through its new digital sales platform, Allianz Alive. “It involved a comprehensive coverage review and upgrade so the cover an SME requires matches the insurance cover our products offer,” he explains. 

SMEs can now receive online cover for more than 2,000 small business occupations through Allianz. “We’re also working with two key broker cluster groups, Steadfast and AIMS, to negotiate broader wordings on behalf of their members. This is all with the aim of providing more comprehensive cover for SMEs.”

Brokers, who are at the coalface when it comes to SME business, often see the results of underinsurance first hand.

Austbrokers Coast to Coast CEO Dale Hansen has spent three-quarters of his 30-year insurance career working with the SMEs and says he spends every day thinking about it.

“In 30 years I’ve handled more total losses than I care to think about, and the only three questions I get asked are ‘am I insured?’, ‘do I have enough?’ and, ‘did I pay?’. The price or relevance of the product rarely comes into it.” 

Dale believes SME insolvency is one of the biggest risk exposures to the growth of the Australian economy. “The insolvency rate of businesses is way too high and we all know that underinsurance and lack of insurance is one of the major components of this. It’s avoidable and it breaks my heart. They say [the premium] is a lot of money when they don’t know what a lot is. We need to get it right at the outset instead of trying to get it right at the end when it’s needed.”

Paul Benjamin, who is Executive Director of Benjamin and Benjamin, a third-generation insurance broking firm named after his father and grandfather, has 14 years’ experience in the SME market. 

He says SMEs typically don’t understand what underinsurance means for them. 

“They think if I insure my building for half a million dollars, the premium might be AU$4,500 a year, but I only want to pay AU$2,500 in insurance premiums. I’ll just go to another insurer who will insure my building for AU$250,000. They don’t understand the impact.”

Having owned and operated businesses outside the insurance industry, Paul knows what it’s like to buy insurance and has witnessed friends suffering the catastrophic effects of bankruptcy as a result of underinsurance or no insurance. 

He says SMEs often underinsure because insurance is complex. “What’s in this long document? I actually don’t understand it. It’s a contract with legal terminology but I own a food shop. I don’t deal in legal contracts all the time.”

Dale and Paul both say SMEs aren’t aware of the types of insurance products on the market, and often think they are insured for something when they aren’t.

They argue one of the key issues the market is facing is confusion brought about by the commoditisation of insurance, a relatively new feature of the landscape. “The problem is SMEs are trying to save money, as they should because it goes to their bottom line,” Paul says. “They think if I can save money on insurance online that’s a good thing. But it’s not always a smart move because the lower the premium, the narrower the cover.”

Dale agrees. “There’s so much choice in the marketplace. We’re being bombarded by adverts telling us that insurance is ‘quick, simple and cheap’; it’s all the same therefore you should pick on price,” he says. “The general public is struggling to know where to turn to for the advice they need.”


Paul Nielsen, Director and Chair of the Council of Small Business Australia (COSBOA), says many SMEs are in denial about the business risks they face. “They tend to think it won’t happen to them, it will happen to the other guy,” he explains. “Because of this, SMEs often view insurance as dead money. They need to understand the value of a good broker. It’s like going to a doctor – you explain your situation and they tell you what you need to do to protect the health of your business.”

But Austbrokers Countrywide Director Mark O’Reilly, whose career in insurance broking started at 18 when he decided he couldn’t stand bricklaying, says the buck stops with the industry.

“We [brokers] protect ourselves by putting the onus back on the customer to inform themselves and make an educated decision about what they should or should not insure for,” he points out. 

“That is a 40-year old broking model and there have been plenty of opportunities for the broking industry and direct insurers to improve on it, but there’s still a long way to go. We’re still sitting back rather than leading clients on a path to inform and educate them so they can make the most appropriate decision,” he says.

Paul adds brokers may win business by providing a cheaper price on the same products offered by a previous broker, but if these products don’t address the customer’s gaps or financial risks, the broker can be sued should the customer be exposed to financial loss.

He, Mark and Dale, who puts in six hours a week at risk education seminars and talks for the SME market, all assert a broker’s job is to educate at every opportunity. “The role of the broker is to look at a client’s individual circumstance and business, understand their appetite for risk, bring them a choice of offerings and explain those choices proficiently,” Dale says.

“Educated buyers purchase in a better way. Sales is just a part of the education game. We are educators first and foremost. Corporate firms have risk managers but SMEs are trying to be jack-of-all-trades. We need to take away their worry by educating them.”

Dale says brokers need to make it clear that if it’s done right, insurance will underpin and assist the growth of an SME’s business. “SMEs respond very well to that conversation. But they also need to own the product and the only way they can do that is if someone finds out what it is they actually need. Products need to be specifically tailored. 

“Once the industry does that as a whole, SMEs will see the value of insurance and their attitude will change. As the level of awareness increases, there will be a more positive view of the industry at large and we’ll find levels of self and underinsurance declining.” All three brokers also say they’re approaching the problem successfully by having robust discussions with clients about their specific business needs using case studies, scenarios they’ve experienced and any available data that provides evidence-based reasons for getting the right cover. This, they say, addresses both the ‘grudge purchase’ issue and means they offer relevant options.

Given insurers have battled with the problem of property underinsurance in the SME market for centuries, Mark says this should be the first one to tackle, especially given widely available property valuation tools and data.

“For example, we consider the square metres of a client’s property up front, something most underwriters don’t do,” Mark says. “We can then apply this to generic building values. We’re not exposing ourselves from a professional indemnity perspective, as the purpose is to prompt the client to compare a below value sum insured with what the real replacement cost may be.”

He relates one such conversation that persuaded a client to increase their sum insured from AU$750,000 to AU$1.2 million. 

“Fast-forward six months, the client has a fire and the first thing he says to us is ‘thanks for that one extra conversation about the sum insured’.”

Meanwhile, Paul says his team strives to take the conversation away from price by doing a proper risk and policy analysis, not just spouting premium quote versus premium quote. “We also guide them to get accredited, independent sum insured valuations plus indemnity period calculations at a minimum by directing them to Cordell’s online calculators, which are often accepted by insurers,” he says.

Dale adds, “We sell an intangible and that’s where we need to draw on our experience and be a storyteller in that space. We give our team a suite of library examples to have with them when they talk to clients about the types of claims we’ve dealt with and our experience with risk. “There are all sorts of things we can do to make the product more affordable. I would rather clients carried higher excesses in certain areas than self-insure where the outcome could be catastrophic. Clients are often surprised in terms of what we come back with that they didn’t think was achievable.” 


Technology has greatly improved the efficiency of business across all sectors of the economy and has also introduced the significant new threat of cyber crime. 

Information technology security company Trend Micro detected more than 66 million[4] ransom ware-related threats around the world from January to May in 2016. Almost 700,000 of those were in Australia and more than 19,000 were in New Zealand.

The latest cyber security survey[5] from Symantec Norton security software shows that 19 per cent, or almost one in five Australian small businesses, have experienced a cyber attack and the number is expected to grow over the next 12 months. Despite this, only 14 per cent of Australian small businesses hold a cyber insurance policy. 

It’s a similar case[6] for small businesses in New Zealand. Symantec Norton data reveals that 6 per cent of small businesses currently hold a cyber insurance policy despite the fact that almost a fifth of the small businesses surveyed had experienced a cyber attack.

1. 16-436MR ASIC reports on corporate insolvencies 2015–16:
2. Vero SME Insurance Index 2016:

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