Can investing in risk management to reduce premiums deliver a return?
In the realm of commercial and corporate insurance, the balance between risk management and insurance premiums often teeters on a delicate scale. Insurers are increasing their demands for enhanced risk mitigation practices from property owners, which raises the question: is it financially wise to invest significant capital into risk improvement initiatives to yield reductions in insurance premiums?
To answer this, we look at some of the considerations and detail a case study.
Considerations:
Identifying Target Areas for Risk Mitigation: Prioritising risk mitigation efforts is crucial. Working with a capable and experienced insurance broker to understand which areas pose the highest risk to your business and offer the most substantial potential for premium savings is paramount.
Cost of Risk Mitigation Projects: In many cases, following through on a risk management strategy has financial implications. Assessing the cost of implementing risk improvement initiatives is essential. It involves evaluating the expenses associated with each project, including materials, labour, and consultant fees.
Modelling Premium Savings: Employing predictive modelling to estimate the potential annual premium savings post-implementation of risk mitigation measures is crucial. This enables business owners to gauge the long-term financial benefits of their investment in risk management.
CASE STUDY | AN AUSTRALIAN FOOD MANUFACTURER
Let’s look at a scenario where an Australian-based food manufacturer is grappling with an insurance premium of $1,200,000. Through collaboration with their insurance broker and risk engineers, the manufacturing facility's major hazard – fire - was identified. The risk assessment pinpointed two critical areas for improvement:
- Bushfire Risk: Proximity to native forests posed a significant threat, as embers from any fire could infiltrate the facility through open holes.
- Building Fire: The existing sprinkler system failed to meet FM certification requirements, leaving the facility vulnerable to fire-related damages.
Recommended treatments:
- Bushfire Risk: Installation of approved steel mesh over building openings to prevent ember intrusion.
- Building Fire: Upgrading the sprinkler system to meet FM certification standards tailored to the manufacturing environment.
After discussing the recommendations with the relevant contractors, the total cost for implementing these risk improvements was estimated at $600,000.
Return on investment analysis:
The insurance broker conducted a comprehensive analysis to assess the return on investment (ROI) based on capital costs and projected premium savings from these new risk management measures:
- Capital Costs: $600,000
- Premium Post-Improvements: $850,000
- Premium Savings: $350,000
Result:
The capital expenditure for risk improvements is anticipated to yield a return period of 1.7 years through premium savings alone.
Conclusion
This case study illustrates the potential financial benefits of investing in risk management initiatives to help mitigate rising insurance premiums.
By strategically allocating resources towards addressing identified risks, property owners can not only enhance the safety and resilience of their assets but also identify significant cost savings in the form of reduced insurance premiums. Ultimately, the decision to pursue such investments should be guided by a thorough assessment of risks, costs, and anticipated returns, ensuring a balanced approach to risk management and financial stewardship.
Austcover Pty Ltd. Operates under AFSL No. 241799. Any advice provided in this document does not consider your objectives, financial situation or needs. You should consider if the insurance is suitable for you and read the Product Disclosure Statement (PDS) and Financial Services Guide (FSG) before buying the insurance. If you purchase this insurance, we may charge you a fee for our service to you. Ask us for more details before we provide you with any services on this product. PDS available on request.
Inspiring Change in the Insurance Landscape
In support of International Women’s Day, Vanessa Jennings, the Head of Portfolio, shares the story of her career path in the insurance industry. Vanessa’s journey, starting from an entry-level position in 1995, showcases her determination, resilience, and commitment to breaking down barriers.
A determined journey
Vanessa’s story begins with her migration to Australia in 1995, where she embraced an entry-level position in a small brokerage. Within months, Vanessa found herself handling domestic and SME business, defying the industry norms that confined women to supportive roles. Undeterred by the scarcity of women in the room at insurance events in the ’90s, Vanessa saw this as a challenge to change the status quo.
Driven by a desire to build her life in Australia, Vanessa pursued the Insurance Underwriting Diploma and later the Insurance Broking Diploma. These qualifications not only equipped her with essential product knowledge but also earned her recognition as a serious contender for roles and promotions. Vanessa, now in a leadership position, encourages both men and women to pursue their career goals, reflecting the positive shift in the industry’s dynamics.
I’m proud of sticking up for myself and not giving up when knocked back from some of those roles on the first try.
As a mother, raising her sons has been one of Vanessa’s greatest inspirations. With her boys grown up, she finds joy in passing on her knowledge, keeping clients satisfied, and savoring a bit more time for herself.
Challenging the norms
Vanessa candidly shares the challenges she faced as a woman in the insurance industry. Initially considered a second choice for promotions due to her gender, she was often assigned “feminine” occupations. Despite being more qualified, Vanessa experienced a significant pay gap compared to her male counterparts. Undeterred, she sought out roles in traditionally male-dominated industries, challenging stereotypes and making her mark in the broking world.
Her persistence in pursuing management roles, despite initial skepticism, paid off. Vanessa takes pride in tackling large male-dominated industries, and ironically, most of her contacts in clients’ businesses are now women.
Inspired by the Best
Vanessa defines someone as inspirational if they excel in areas where she aspires to grow. One of her inspirations is Gail Kelly, the trailblazing CEO of Westpac and the first female CEO of a major bank. Gail’s ability to balance a successful career with raising five children resonated with Vanessa, inspiring her to pursue her own success in the industry. Other influential figures include Ita Buttrose and Margaret Thatcher, who left a lasting impact on Vanessa’s perspective.
Timeless advice
Reflecting on her journey, Vanessa shares invaluable advice she would give her younger self: “Investing time in myself is worth every second.” She encourages taking walks, lifting weights, and prioritizing self-care without feeling guilty about time spent for personal well-being.
Vanessa Jennings is not just a leader at Austcover; she is a trailblazer who has broken glass ceilings and continues to inspire those around her. Her story is a testament to the power of determination, resilience, and self-investment in achieving success in the insurance industry.
Insurance implications for Valuers: Evolving risk landscape
In the ever-changing world of valuation, Valuers are facing a shifting landscape that demands legal interpretation and a comprehensive insurance and risk management program specific to their situation.
Over the past few years, monetary policy has had significant implications for Valuer businesses, affecting their exposure to risks and prompting the need for a proactive insurance approach.
Monetary policy tightening and the implications for Valuers
The Reserve Bank of Australia’s (RBA) rapid tightening of monetary policy over the past two years has reshaped the financial landscape. In April 2022, the target cash rate stood at a mere 0.1%, contrasting sharply with the current rate of 4.35%. With an RBA announcement due on 19 March 2024, some economists predict the rate will remain high.
This, and further tightening not being ruled out, has consequences for Valuers as higher interest rates can cause the loan default rate to increase. In turn, that increase poses a direct threat to Valuers, making it imperative for businesses to reassess their risk management strategies and insurance coverage.
Challenges continue in the Plant, Equipment, and Machinery sector
Valuers who work in the plant, equipment, and machinery sectors face unique challenges due to asset inflation. Supply chain disruptions and availability issues have contributed to inflation in the sector, which makes accurate valuations more complex. The higher value of assets increases the pressure on Valuers to assess their clients’ properties accurately, despite the market’s volatility.
Monetary policy tightening, reflected in the Reserve Bank of Australia’s rapid rate increases, demands Valuers reassess their risk management strategies and insurance coverage, as higher interest rates pose a direct threat to their businesses.
CBD property market reaching its trough
Since the global pandemic, commercial property values have been in difficult waters. Changing working habits, rising interest rates and uncertain conditions for businesses, has caused values to drop sharply; with some major CBD office towers selling at 20% discounts from their peak.1
Discounted commercial deals and uncertainty around when the market will reach the bottom means Valuers will be watched closely by the market as investors look for the tide to turn.
Knowing specific risks associated with each sector is a vital piece of the puzzle for Valuers to reduce their liability risk when informing their clients. Working with an insurance broker who understands the sector and can provide valuable input into your insurance program is essential in successfully navigating tough market conditions.
Is positivity on the horizon?
There may be some relief, however. A 2023 court hearing looked again at the approach taken when assessing a Valuer’s duty. In the Hope Capital vs Alexander Reece Thompson decision2, it suggests that Valuers may not be held liable for all financial consequences of a potentially negligent overvaluation, noting that the historical SAAMco principle3 established in the 1990s, may not be as straightforward to apply in all cases.
This stems from the scope of duty and whether the Valuer had assumed responsibility for the risk of the whole transaction, or just for part of it, when considering other factors which contributed to the overall lending decision.
This decision has the potential to reduce the financial impact of professional indemnity claims against Valuers. Underscoring the importance of understanding and defining the precise scope of a Valuer’s responsibilities in each case.
Insurance considerations
Like all businesses, those offering valuation services require insurance solutions that offer complete coverage at an affordable price. However, balancing affordability with comprehensive protection in this sector can be difficult. It’s advisable to find insurance packages tailored to the sector’s specific financial limitations. This is where the expertise of an experienced insurance broker, who understands the risks involved, becomes essential.
Several critical factors need to be weighed up when structuring the right insurance program:
Size of Deductible: The size of the deductible should be a vital step in insurance considerations. Austcover has seen that Valuers who carefully evaluate and select a deductible that aligns with their risk tolerance and financial capacity, are more likely to have a sustainable insurance program.
Availability of insurance for certain sectors: Valuers operating in specialised industries must ensure that insurance coverage is readily available for their specific valuation areas. Austcover, with its extensive industry expertise, works closely with Valuers and the insurance market to find tailored solutions that address the needs of certain segments of the valuation market.
Balancing affordability with comprehensive protection is challenging, making the expertise of an experienced insurance broker crucial in tailoring packages to address the sector’s specific financial limitations.
Contractual risk management: Valuers can proactively manage risks through robust contractual agreements. This includes focusing on Limitations of Liability, Indemnity Capping, and Warranties. By clearly defining the scope of their responsibilities and limitations, Valuers can mitigate potential legal disputes and financial liabilities.
Professional indemnity: Ensuring their professional indemnity insurance program addresses both civil liability obligations and contractual duties is a critical part of a risk mitigation strategy. This dual focus ensures appropriate coverage, safeguarding Valuers against potential legal and financial ramifications arising from their professional activities.
Australian Property Institute Valuers – Professional Standards Scheme: Valuers can obtain protection via the Australian Property Institute Valuers Professional Standards Scheme. The scheme is intended to ensure minimum professional standard and limit exposure for valuers via Liability Caps. It is critical to ensure that all scheme requirements are met in order to access the Liability Cap.
Compliance with Policy Conditions: Some professional indemnity policies will contain prescriptive conditions around issues of type of assets valued, type of lending institutions and loan to value ratios.
Navigating the terrain
Valuation professionals can benefit from the expertise of an insurance broker to tailor their insurance approach and mitigate specific business risks considering the changing landscape.
At Austcover, our dedicated team of experienced insurance brokers stands ready to help Valuers navigate these evolving risks. Our deep understanding of the unique challenges can help strike the perfect balance between comprehensive coverage and affordability.
At Austcover, you’re not just covered, you’re Austcovered.
Sources
1. Nick Lenaghan, Property Editor – Australian Financial Review 26 February 2024. Office Values Plunge as CBD market Bottoms – https://www.afr.com/property/commercial/office-values-plunge-as-cbd-market-bottoms-20240216-p5f5kr
2. Clyde & Co. Market Insight, 21 December 2023. https://www.clydeco.com/en/insights/2023/12/hope-for-valuers-hope-capital-v-alexander-reece-th
3. DLA Piper. Insights 27 June 2021. https://www.dlapiper.com/en/insights/publications/2021/06/saamco-revisted
Austcover Pty Ltd. Operates under AFSL No. 241799. Any advice provided in this document does not consider your objectives, financial situation or needs. You should consider if the insurance is suitable for you and read the Product Disclosure Statement (PDS) and Financial Services Guide (FSG) before buying the insurance. If you purchase this insurance, we may charge you a fee for our service to you. Ask us for more details before we provide you with any services on this product. PDS available on request.
BALANCING ACT: Subcontractors putting excess on the rise
Over the recent years, the construction industry has seen a rapid increase in premiums. As construction activity has increased and the demand for skilled labour has risen, many businesses in the sector have turned to contractors and subcontractors to bridge the staffing gap. While sub-contracting or labour hire services offer a solution to skill shortages, it brings forth a unique set of challenges for insuring construction projects.
With increases in the frequency of injury and workers' compensation claims brought by contractors and sub-contractors, this has had a knock-on effect on premiums and excesses, with businesses heavily reliant on contractors for their projects feeling it the most.
As insurance brokers with a diverse construction portfolio, we've seen a growing apprehension among insurers when it comes to covering public liability if a business has a substantial portion of its revenue allocated to sub-contractors.
The balancing act between benefits and risk
Principal contractors, when managing the risks and work health and safety plan of a construction project, often see subcontracting as a strategic move to help mitigate risk. The premise is straightforward ‑ subcontractors bear responsibility for any personal injury or property damage resulting from their negligence. Many principal contractors also require subcontractors to have adequate public liability insurance before getting on-site, often with a minimum sum insured of $20 million.
However, insurers are cautious about this seemingly simple transfer of risk. The primary concern revolves around workers' compensation. In recent years, insurers have faced substantial payouts due to workplace injuries. In some instances, settlements in court have deemed principal contractors as 'quasi employers' when they have actively engaged in the training, induction, and supervision of subcontractors.
Principal contractors have a responsibility to provide a safe workplace, ensuring that the project's safety protocols, and operational procedures are understood. If an injury arises out of this duty not being met, a subcontractors' workers' compensation insurer may seek to recover a portion of the payments from an insured's liability policy. This is known as a 'Worker-to-Worker' claim. These often take a long time to resolve due to multiple parties being involved and can be much more costly than a typical public liability claim.
Reduced appetite, leading to high excesses
In response, insurers have taken measures to manage risks associated with contractor and subcontractor payments. There is a reduced appetite for businesses with contractor payments exceeding 15-20% of revenue. Insurers willing to cover such risks may impose separate premiums for the specific 'worker-to-worker' exposure and it's not uncommon that high excesses, ranging from $50,000 to $250,000 may be applied to 'worker-to-worker' claims.
Helping mitigate rising costs
The situation is slowly improving. We believe we've seen the peak of rising excess levels and early signs for 2024, show that a potential increase in competition for the insurance market is promising for businesses. However, there are factors to consider when assessing your insurance program.
Consult a specialist insurance broker
Partner with an insurance broker who has a deep understanding of public liability in construction and for contractors and subcontractors. At Austcover, our teams are experienced in helping principal contractors manage their insurance program, through thorough analysis of their situation and implementing risk management strategies to help reduce premiums.
Split sub-contractor payments
When disclosing subcontractor payments, provide a detailed split between labour, plant, and materials. By isolating the labour component of your payments and focusing the insurer on the specific 'worker-to-worker' public liability exposure, your premiums can potentially be reduced.
Maintaining a balanced outlook
By working closely with specialised brokers to proactively manage insurance programs, a principal contractor can be better informed of the complexities of using contractors and sub-contractors on their projects. Ensuring they can meet their skilled labour needs while helping to mitigate their potential liabilities.
Austcover Pty Ltd. Operates under AFSL No. 241799. Any advice provided in this document does not consider your objectives, financial situation or needs. You should consider if the insurance is suitable for you and read the Product Disclosure Statement (PDS) and Financial Services Guide (FSG) before buying the insurance. If you purchase this insurance, we may charge you a fee for our service to you. Ask us for more details before we provide you with any services on this product. PDS available on request.
Austcover Announcement
Austcover are pleased to announce a planned merger with Regional Insurance, to offer a unified insurance broking solution to the Queensland market. Taking effect from 1 July 2021, both Austcover and Regional will continue to operate under their existing brand names, but will share networks, systems and processes alongside a joint strategic growth plan.
This merger offers customers an exciting opportunity to tap into an even stronger broker network, supported by the rich heritage and experience of both organisations in the insurance broking market. Regional’s existing CEO, Tim Mathieson will lead both organisations, with Austcover CEO, Maria Parry taking the lead of the combined broking team.
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