Small to medium-sized businesses are often paying for unnecessary levels of liability and indemnity cover due to issues including government contract requirements and advice from brokers, a Business NSW report says. 

Liability and indemnity insurance is typically purchased at rates 150-300 times the average national claim, meaning many businesses are paying high premiums they will not benefit from, the report released this week says. 

“This can stem from excessive requirements included in government tenders and procurement processes,” it says. 

“However, it is also more commonly a case of the business itself or its insurance broker viewing maximal insurance coverage as being ‘best practice’, regardless of the cost or fit to a particular business’ circumstances.” 

The report, titled Insurance at the Speed of Business, recommends that NSW Government audit procurement policy across its agencies to confirm that insurance required by businesses is aligned and fit for purpose. 

Businesses often struggle with the probability calculations underpinning insurance, which also contributes to a marketplace in which customers often feel as if they should acquire far higher coverage amounts than they are likely to need, according to the report. 

Pricing transparency should enable a policyholder to correlate the premium charged with the level of risk predicted, but a rudimentary understanding of how risk is monetised by an insurer is necessary, unless the information is presented clearly, to conclude if a premium represents value, and is “affordable”. 

Business NSW proposes federal and state co-funding for insurance education, and says insurance providers and brokers should strive for greater transparency in both existing and novel products, with probability-based examples given to potential customers to aid comprehension of the product on offer. 

The report finds the tourism, construction, engineering, professional services and hospitality industries are particularly hard hit by affordability and availability issues and it calls for product innovation and solutions that can deliver faster benefits. 

In the case of mitigation and property cover, it notes that new infrastructure takes time and resourcing, and master-planning townships away from high-risk areas will take decades to realise. 

“Such slow-moving reforms offer cold comfort to businesses facing insurance premium rises, or uninsurability, that will lead to them ceasing to operate long before any improvements are realised,” it says. 

Other recommendations include that the Australian Securities and Investments Commission audit the insurance market model to ensure brokers give at least two quotes and adhere to a minimum standard in explaining the pros and cons of options. 

It proposes creating workshops to determine customer and supplier interest and support for alternative products in the areas of professional indemnity for specialised construction, public liability for tourism activity-based businesses, and geographic solutions for bushfire/flood prone locations. 

The report suggests the NSW Government run an innovation market testing procurement that has objectives such as reducing government liability as insurer of last resort, reducing premiums and offering alternative coverage where it’s currently unavailable or unaffordable. 

The report is available here.