Many slip into too-high insurance

Until this week, my car was insured for $49,000 but it's worth only $30,000. That poses a potential moral hazard, but it's also a waste of money for someone who hopes not to make a claim and won't have a "lucky" fire. Plenty of businesses are in the same position of paying higher premiums than they need to.

In light of Rene Rivkin's 1993 Offset Alpine fire (bit.ly/13thav4), cynics might suggest there's an up side to business being insured for more than it's otherwise worth. Chronic under-insurance rather than over-insurance is the norm for Australians, yet it's easy to find yourself paying more than necessary.

It's the nature of small to medium enterprises in particular to be too busy for what might seem minor details - such as checking that you still own the listed assets on an insurance form filled out many months ago.

For example, a vehicle can be sold but no one tells the insurance company and the premium remains.

The nature of a business can change and, with it, the sort of risks undertaken. A business can act to reduce its exposure to risk - improve security, install new locks and systems - but, again, neglect to mention it to the insurer.

Insurance policies can unnecessarily overlap so a business can be paying for insurance it already has, or, in the matter of workers' compensation insurance, a business might slip into an incorrect category with a higher premium. For larger businesses, their own safety and claims record becomes a factor in workers' comp premiums - another incentive to train for a safer workplace.

One place to start finding ways to lower premiums is to ask your insurer or broker - despite the financial incentive they might seem to have in maximising premiums. Any half-decent insurer or broker will value a long-term relationship much more than a briefly inflated premium.

Such a conversation will inevitably enter the realm of a policy's excess and the correct insured amount. They should be two different matters, but many businesses and individuals end up in trouble by confusing them.

Just as an agreed higher or lower excess lowers or increases motor vehicle insurance, altering the excess - effectively the part of a claim a business is prepared to self-insure - can reduce or increase business insurance premiums.

On the other hand, businesses and individuals can unconsciously find themselves self-insuring by underestimating the value of what they want covered. For example, a business might have $200,000 replacement value for contents and stock, suffer a fire that does $100,000 worth of damage but receive only part of that amount.

If the assessed replacement value of the entire contents and stock turns out to be $300,000, the policy effectively is for only two-thirds of any claim. Instead of $100,000, only $66,666 would be paid with the business unwittingly self-insuring for the other third.

That's a simplistic example. The real-world experience of an insurance payout shortfall on top of the dislocation and disturbance that tends to accompany a loss can make business very difficult indeed. Managing a higher excess is a quantifiable decision - dealing with the loss of equipment and perhaps not having the wherewithal to replace it is another matter altogether.

For a small business that can have proportionately large fluctuations in stock levels, it's possible to be unwittingly caught with too little insurance or, if the business is winding down or changing direction and not as much stock is required, it may be wastefully overinsured.

Some business changes can occur subtly without the owner considering the insurance implications. An electrical contractor can find himself moving from being on the tools with all the risks and equipment involved in 240 volts to consulting on wiring and intelligent control systems with less risk and requiring minimal stock or tools, but neglect to update his business insurance.

Alternatively, a small IT consultancy can start the year with little in the way of stock, find a niche in supplying the latest i-thingy and discover they're holding a crate of the things at the back of the office.

A theft or fire suddenly becomes very expensive.

One of the insurance industry's handy aphorisms is "don't risk a lot to save a little", but there's also no point in paying more than necessary to cover correctly calculated risk.

And that's where the bottom line for all such exercises comes into play: shop around.