They say prevention is better than cure. Unfortunately, human nature often means we are not always excellent at preparing for the unexpected. With the cost of doing business becoming an increasing issue for many small business operators in Australia it’s easy to cut corners and try to avoid those costs that seem to offer little or no payback.
Sadly insurance seems to be one of these. According to the Insurance Council of Australia 26% of small enterprises do not have any form of general insurance. Amongst sole traders this figure escalates to an astonishing 40%. Under-insurance is a very real issue for Australian businesses.
So how much insurance is the right amount…and what type of insurance should a small business have?
Choosing your insurance is a balancing act between premiums and cover. Insurance policies offer considerable flexibility to help you manage your individual risk. The level of cover and the amount of excess can all make significant differences to the premium you need to pay.
So, what types of insurance should be considered? There are policies available for almost anything you can imagine…and if they don’t exist insurance companies are often willing to write one for you. That said there are several common forms of coverage that every business should consider.
General, Theft and Fire. The ‘catch all’ of insurance for business. This will cover you for loss or damage to assets you may own in the event of an event or disaster. Stock and plant are normally covered under this policy. The key factors in determining the level of insurance will include:
- How much risk am I willing to assume myself?
- What types of events do I need to ensure I am covered for?
- What would it cost me to replace these items should I lose them?
The higher the excess, or level of risk you are prepared to cover yourself, the lower your premium would be. In some cases, you may feel the risk of a loss isn’t high enough to warrant a lower excess and higher premium.
You also need to consider how comprehensive the policy will be. Some policies will cover you for more risks and events, but obviously at a higher premium e.g. earthquake or flood. You also need to consider the true cost of replacing your items. You may have $150,000 of stock on hand but could you purchase it again at this price? You may have a specialised piece of equipment that costs $200,000 to replace, but if there are additional costs in overseas travel to source it or flying in experts for installation this needs to be considered too.
Property. Do you own your property? What would it cost you in the event of its destruction? Again, it’s not just the cost of replacement to consider but the cost of relocating to temporary premises in the meantime.
Public Liability. This provides protection in the event that your business or employees cause loss or damage to the wider community e.g. a driver crashes into a bridge or business that you must compensate. Most Public Liability policies offer a high degree of cover for a very reasonable premium.
Loss of Profits. This covers you for the lost income you may suffer in the event of your business no longer being able to trade. It will also cover you for your ongoing expenses such as rent or rates that you may be forced to continue paying. A building damaged by fire is one thing, no longer being able to operate for 4 months as a result is another issue altogether.
These are just a few of the policy covers you should consider, but your individual and business circumstances will leave you exposed to other risks you should consider getting cover for (e.g. life insurance to cover mortgage repayments in the event of death).
If necessary, you should consider getting professional advice. This will help you understand your options. Fear often comes from not understanding and simply having a good Advisor explain your situation will go a long way towards improving how you feel and what you can do.
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The information in this article is general in nature and does not take into consideration your personal situation or circumstances. You should consider whether the information contained in this article is suitable to your needs and where appropriate, seek professional advice from a Financial Advisor or other finance professional.