As a small business owner you’ve probably spent a great deal of time and money to ensure success. You might have sacrificed things and taken risks to turn your idea into something tangible. You may have chosen to do your own bookkeeping, develop your own website and man your own phones in a bid to reduce costs. And you might even be thinking that insurance is just another cost that you can afford to forgo. But have you considered the true financial impacts?

For many small businesses, price is the most important factor when it comes to insurance. As we’ve discussed previously, most of you will be forced to buy insurance through a broker as the insurer will not want to deal direct with you. This means that you may end up paying for cover that you don’t need (although you need to be the judge of that), and you might also pay a insurance broker a fee or commission through your premium. In addition, it is likely that you will be paying for the same insurance product (see the burglary insurance example) as this is the main way in which insurers ‘compete’.

Of course, insurers will argue that they need to hold greater reserves to cover claims but then this is a difficult argument when major insurance companies such as Suncorp are doubling their profits. Still, according to our industry sources, premium rates for small business insurance are still highly competitive…

So, what does this mean for you? Well, consider the photocopier in your office. You like to own what you have and don’t see much point in leasing so you went out and spent a few thousand dollars. The old one died some time ago and is collecting dust in your filing room as ‘insurance’ just in case your new one breaks down. You know that it will cost you about $550 to get the old one repaired.

What happens if your there’s a fire (maliciously lit) in your office over the weekend and you lose both? Well obviously you will need to replace at least one of them – of course, at your own cost as you weren’t insured!

So Mary Joe accidently spills water on the new one whilst she’s photocopying, taking phone calls on the mobile and sorting through the mail. Now you have to get the new one and the old one repaired or replaced.

Say you previously did get the old one repaired and forked out the $550, well, you probably could have insured the new one for about $150 for breakdown therefore actually saving money by taking our business insurance. In fact depending on your policy and your insurer, you probably could have paid $600-$700 (and claimed the GST) and had all of your business contents covered – now wouldn’t that be a better outcome rather than you taking on the risk?

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The latest report on the insurance industry by PricewaterhouseCoopers Australia reveals that Australian insurers are still doing quite well despite a string of recent catastrophes.

At the same time however, industry analysts are reporting that premium rates will increase over the coming months as insurers attempt to recover from poor investment results suffered recently.

With businesses in Australia still recovering from the aftershocks of the GFC, it’s disheartening to see premium increases at a time where some of Australia’s biggest insurance companies such as QBE, Suncorp and Allianz are making hundreds of millions of dollars in net profits after tax. According to the PWC report for example, QBE made $1.97 billion dollars in after tax profit whilst Suncorp made $394 million.

This comes as no surprise given our earlier article on premium increases for businesses during June. Of course, we need not expect much from insurers as the customer is generally a lower priority.

With so much of the Australian insurance market ‘stitched up’ between the top 3 insurers – QBE, Suncorp and IAG and little room for industry consolidation, insurers are looking to invest their money in acquisitions abroad rather than in developing new products or enhancing service for customers.

A shock announcement by Australia’s second largest insurance company IAG (owners of CGU, Swan Insurances and NRMA Insurance) that it will downgrade it’s profit expectations for 2010 will have an impact on its Australian customers.

Costs of $365 million for its IAG UK operation have added to losses following the Melbourne and Perth hailstorms earlier this year. This will reduce IAG’s profits down to about 6%, down from the previously expected 13%.

As a result IAG have announced that they will be recruiting “experienced individuals” in underwriting (i.e. risk selection) and actuarial (i.e. pricing) roles…better late than never..However, this also means that IAG will pass on rate increases in the order of 3-5% to its Australia customers in order to make up for the UK losses.