Educating your SME clients about just how much of their premium goes in taxes will hopefully help turn the tide against this draconian practice.
The problem with under-insurance is that it only gets widespread attention when a calamity occurs, such as the catastrophic bushfires that razed many parts of Victoria in early February and cut short so many lives. And while politicians may express concern at times like this about levels of under-insurance in the community, they play a key role in perpetuating the cycle, courtesy of the draconian taxes imposed on premiums at both State and Federal Government level. Indeed, you could say general insurers are increasingly becoming de facto tax collectors for these bodies – a fact that has gone beneath the radar
of policyholders for far too long.
I’d hazard a guess that few of your clients would even be aware of the staggering proportion of their premiums that go directly into taxes. Perusing policy documents is rarely on the ‘to do’ list of your average time-poor small business operator. In the case of the Fire Services Levy (FSL), I doubt that anyone outside of insurance circles would even realise that these emergency services are funded primarily by policyholders, who effectively subsidise people who don’t have insurance.
Zurich’s actuarial teams recently took a look at what proportion of gross premiums for a retail shop were made up of taxes.
Their findings may surprise you. Taking into account FSL, stamp duty and Goods and Services Tax (GST), taxes usually constitute somewhere between 30 and 40 percent of the total gross premium for an average NSW retailer with fire, public and product liability cover. Things only get worse as you move south. In Victoria, these taxes can comprise between 35 and 60 per cent of the premium.
Only a few days before bushfires ravaged many parts of regional Victoria, Noel Pettersen from the National Insurance Brokers Association (NIBA) drew attention to the plight of rural commercial insurance buyers in Victoria, following another 5 per cent hike in the FSL. (The FSL component of rural commercial policies in Victoria now stands at 63 per cent of the premium.) As he pointed out, these policyholders were being forced to pay nearly $1 in tax for every $1 in premium.
Few people would dispute that small to medium enterprises (SMEs) are the backbone of Australia’s economy. In the present financial climate, governments should be looking for constructive ways to help out small business people. Cutting insurance taxes would be a good start.
When you look at the reasons SMEs give for under-insuring or, worse still, not insuring their businesses, the cost of insurance is often cited. According to Insurance Council of Australia (ICA) research, one in every four SMEs doesn’t have any form of general insurance, with sale traders having the highest rate of non-insurance (40 per cent). And these statistics are likely to be optimistic, given the research was done before the credit crunch hit home.
At a time when commercial credit is hard to come by and few companies have enough fat in their budgets to weather even a minor setback, it’s imperative that governments do their bit to ensure small businesses have access to affordable insurance options to protect their interests should a catastrophe occur.
Loading insurance premiums with punitive government taxes, which comprise (at best) around a third of an SME’s premiums, only serves to exacerbate the chronic levels of under-insurance across the sector. Tax reforms would be a big help in reversing this worrying trend.
Andrew Barrowman, Zurich, General Manager – General Insurance