Inflation and Rising Business Insurance Premiums in Australia

As a small to medium-sized business owner in Australia, you may have noticed that your insurance premiums have been continuously increasing. One of the key drivers behind this rise is inflation. Inflation is a persistent increase in the general price level of goods and services in the economy over time.

This article explains the relationship between inflation and the rising insurance premiums businesses face in Australia. We’ll explore how inflation affects business insurance and provide insights to help you navigate this challenging landscape.

What is inflation?

Before delving into its impact on insurance premiums, let’s briefly understand what inflation means. Inflation occurs when the purchasing power of money decreases, leading to a rise in the overall cost of living. As inflation takes hold, each unit of currency buys fewer goods or services than it did before.

How Inflation Affects Business Insurance Premiums

Business insurance is essential for protecting your business against various risks and liabilities. However, inflation can significantly impact insurance premiums for businesses in the following ways:

Higher Claims Costs

Inflation affects the cost of goods and services, including those required for repairs, replacements, and medical treatments. As a result, the claims costs for insurers also increase. To accommodate these higher expenses, insurance companies may adjust their premiums upwards.

Increased Operating Costs for Insurers

Insurance companies, like any other business, face higher operating costs when inflation rises. Expenses related to staff salaries, office space, technology, and utilities all tend to increase. To maintain profitability, insurance providers may transfer some of these costs to policyholders in the form of higher premiums.

Increased Cost of Building Materials & Labour

The cost to repair or rebuild has astronomically risen since Covid-19. This, along with inflation, has seen the building industry struggle to meet the rising costs and timeframes and therefore, costs have blown out significantly.

Asset Valuation Challenges

It is also important to note that insurance companies invest the premiums collected from policyholders to generate income. However, in an inflationary environment, the value of assets, such as bonds and stocks, may decrease in real terms. To make up for potential losses, insurers may raise premiums to ensure their financial stability.

Reinsurance Costs

Insurance companies often purchase reinsurance to protect themselves against significant and catastrophic losses. Reinsurance is a risk management strategy used by insurance companies to transfer a portion of their insurance liabilities to other insurers, known as reinsurers. In simpler terms, it is insurance for insurance companies. Reinsurers also face the impact of inflation, and when their costs rise, they can be passed on to primary insurers, leading to higher premiums for businesses.

Types of Business Insurance Impacted by Inflation

Inflation can affect different types of business insurance, with the following being particularly impacted: 

Property Insurance

Property insurance covers assets such as buildings, equipment, and inventory. In an inflationary environment, the costs of construction materials and labour tend to rise, leading to higher rebuilding or replacement costs. Consequently, property insurance premiums may increase to reflect these higher expenses.

Liability Insurance

Liability insurance, including general liability and professional liability insurance, can also be affected by inflation. As legal and medical expenses rise with inflation, the costs associated with potential liability claims also increase. This may result in higher premiums for businesses seeking liability coverage.

Motor Vehicle Insurance

The costs of vehicle repairs and medical treatments related to motor vehicle accidents can rise with inflation. As a result, insurance providers may adjust motor vehicle insurance premiums to account for these higher expenses.

Strategies for Businesses to Manage Rising Insurance Premiums

As a small to medium-sized business owner, managing increasing insurance premiums is crucial to your company’s financial well-being. Here are some strategies to help you mitigate the impact of rising premiums:

Risk Management

Implement effective risk management practices within your business to minimise potential insurance claims. Insurance providers often offer premium discounts for businesses that demonstrate proactive risk management.

Review Coverage 

Regularly review your insurance coverage to ensure it aligns with your business’s current needs. If you need more clarification about what types of insurance you need, ask your insurance broker to provide you with a risk report so you can make sure you have the necessary insurance you need to operate your business. You can also adjust coverage limits to help optimise costs. However, this is not recommended in case you compromise essential protection.

Shop Around

Don’t be afraid to ask your insurance broker to explore different insurance providers and compare quotes. Each company may have its own approach to pricing, and shopping around can help you find more competitive premiums for suitable coverage.

Higher Deductibles 

Consider opting for higher deductibles, which can lead to lower premium payments. However, be sure to assess your business’s ability to manage the deductible amount in the event of a claim.

Final Thoughts

Inflation is an economic reality that impacts various aspects of the business world, including insurance premiums. As prices rise in Australia, insurance companies face increased operating costs, higher claims expenses, and asset valuation challenges. This, in turn, leads to rising business insurance premiums for small to medium-sized businesses.

While businesses cannot control inflation, they can take proactive measures to manage the impact of rising insurance costs. By implementing risk management practices, reviewing coverage regularly, shopping around for competitive quotes, and considering higher deductibles, businesses can navigate the challenges posed by inflation and ensure their insurance remains affordable and effective in safeguarding their operations.

Staying informed about economic trends and working closely with experienced insurance professionals can empower you to make well-informed decisions to protect your business while managing the impact of rising insurance premiums in an inflationary environment.

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