The forgotten insurance cover

Underinsurance and misinsurance have dominated the insurance vernacular for some years and are now pointed to as key reasons we need a robust and sustainable life insurance industry and advice profession.

The longer Australians have inadequate and inappropriate cover, the more the strain on the already sparse federal government coffers. Rice Warner quantified the problem in December 2013 in their groundbreaking underinsurance report , which estimated:

• The total cost to government of life underinsurance across Australia is $47 million per annum.
• The total cost to the government of Total and Permanent Disability (TPD) underinsurance is $1.26 billion per annum.
• The total cost to government of income protection underinsurance is $247 million per annum.

However, while underinsurance at a community level is concerning, among the small business sector the lack of appropriate life cover is a ticking time bomb.

With one of the key priorities of this year’s Federal Budget assisting small businesses – especially those that employ fewer than five people – it seems paradoxical that this sector of the economy is arguably among the most underinsured in the entire community.

Research from 2014 by the Cameron Group into the insurance behaviour of Australian small business found only 8 per cent of small businesses (that is, five employees or less) has cover for business expenses. This leaves a staggering 92 per cent without cover for day-to-day business expenses such as wages, rent and equipment costs.

Plan for Life data backs this up, finding that Business Expenses premiums account for less than 4 per cent of the new business premiums written for Income Protection cover.

In a nutshell, this means the livelihoods of those employed in small businesses, and those who supply to small businesses, are at risk if the owner of that business is temporarily unable to work because of accident or illness. Even minor conditions such as a broken arm or leg could lead to financial issues if the business owner is solely reliant on income protection insurance to cover their own salary and keep a business going.

Beaton Research found less than two-thirds of generalist advisers promote business expense cover, suggesting the problem is as much in the awareness as it is in the take-up.

This reinforces underlining the importance of specialised advice in this segment. At a time when life insurance advisers are looking to build a stronger, more focused value proposition, business expense cover represents an opportunity for advisers to develop specialist skills – which will not only differentiate them from their peers, but will also allow them to tap into customers with more willingness and capacity to pay advice fees.

So what is the problem?
I spend a great deal of time with advisers, and recent conversations I’ve had with those in multi-faceted practices has shed some light on the misconceptions that exist about business expenses cover.

One advice business sourced clients from three distinct groups – existing clients, accountancy referrals and mortgage broker referrals – however, the positioning of the referral in the mind of the customer differed by the referral source. From the mortgage brokers, it was a “free” review of their super. From the accountants, it was for investment strategy advice for their SMSFs.

Income Replacement insurance was always a discussion that was had with the customer, but they never positioned business expenses. Why? The feedback I received suggests:

1) The clients had come for investment advice.

2) The adviser had no idea how business expenses worked.

3) If the adviser didn’t understand their expenses, he did not want to look incompetent.

4) The adviser had no idea how claims for business expenses worked.

The myth of complexity
Business expenses cover is actually quite simple, as a concept and as a product. Some insurers even offer it as an option under income protection, rather than a stand-alone policy, to help streamline the application and underwriting process.

Another way to keep it simple is to just cover the more significant costs, which also should be simple enough to uncover (as well as justify at claim time), and will ensure clients aren’t excessively disadvantaged by only receiving income replacement benefits at claim time. This ensures they can sustain the business when it is needed the most.

If you think about covering the main items such as rent, lease costs, and repayments for equipment, then when it comes to claim time, these are easy to establish without the need for complex recalculations each month, making the financial part of a business expenses claim much simpler.

For example, questions that could be asked are:

• What are your equipment lease payments?

• What are your business loan repayments – and what are they for?

• What is the rent on your premises?

• What wages do you have for staff?

These items are some of the more common profit and loss items that are generally considered for business expenses cover.

It’s also a good idea to ensure your clients appreciate the indemnity nature of business expenses cover, which is about covering the shortfall up to the insured benefit. There shouldn’t be an expectation that the full benefit will always be paid on claim.

Much like contents insurance at home, you wouldn’t expect to be paid $60,000 for your contents if only $3,000 worth was lost in a burglary.

So why bother at all? Well, if you have facilitated income protection cover for a client but not business expenses, how would your client survive in a scenario like the one below?

Surviving on 75 per cent of pre-disability income can be challenging. Surviving on 53 per cent may be near impossible, and not only put at risk the lifestyle of the business owner but potentially also jeopardise the entire business and its staff.

For the sake of your client, you owe it to them and yourself to have the conversation and put Business Expenses protection top of mind – not bottom of the pile.

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^{1.Rice Warner Underinsurance Report December 2013.}

^{2.The Australian Small Business Market for Financial Services: Cameron Research, 2014.
3.Plan for Life Insurance data 2014.}

Andy Marshall, Head of Sales Strategy & Research, Zurich Life and Investments