Australian businesses have been warned they may face a rising insurance protection gap as technology and globalisation increase the potential for disruption and new risks emerge.

“Despite its size and ranking, surveys indicate there is still significant scope for strengthening of the business sector risk management discipline in Australia,” a Swiss Re Institute report on the local commercial market says.

“Disruption to operations is one of the key risks facing business today and an area where many Australian firms, particularly SMEs, are underinsured. We see this trend increasing in the face of disruptive technology.”

Commercial insurance penetration in Australia was 0.8% of gross domestic product last year, compared to 1.6% in the US and 1.1% in the UK.

Businesses often cover property risks without considering supply chain disruptions and issues such as increased exposure to cyber threats brought about by the increasing use of digital connectivity, Swiss Re says.

“On the business interruption side very few [SMEs] actually have cover,” Swiss Re Corporate Solutions Head of Sales ANZ Stephen Higginson told insuranceNEWS.com.au.

“There are a lot of people who buy insurance who don’t have full coverage because they are not protecting against those impacts to their business.”

Mr Higginson says the size and spread of the Australian population and the smaller economy contributes to lagging insurance penetration compared to the US and UK, while SME owners that have come from regions without a strong insurance heritage may overlook the need for cover.

Swiss Re says businesses also need to watch for interlinked emerging risks that have been highlighted in its annual Sonar report, including a reliance on algorithms, lurking cyber risks and geopolitical shifts.

Mr Higginson says the emerging risks threaten to widen the insurance gap and risk professionals need to keep an eye on the trends.

“They clearly need to be focussed on the day-to-day issues that could cause disruption, but they also need to be very aware of the issues that are coming down the line which could impact the business in due course,” he said.

Swiss Re says interest in parametric insurance products is increasing, particularly related to non-physical damage business interruption (NDBI) for difficult-to cover risks.

Examples include a pre-agreed payment if cyclone wind speeds hit a set level near a location, providing a quick mechanism for delivering funds and easing cashflow problems after an incident.

“It is essentially a financial mechanism, not an insurance product, because it is not based on an indemnity. But it is still a manner in which you can manage a risk you don’t want to just live with on you own,” Mr Higginson said.

“It is not a replacement for insurance, but it is certainly an alternative under certain circumstances.”