CPD: Risky business – Australia’s underinsurance problem

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…people think they are adequately insured but a dire turn of events proves them wrong.

Although it’s well documented that many Australians are not insured, particularly when it comes to covering life and traumatic events, the 2019-2020 summer has brutally highlighted the underinsurance problem – that is, when people think they are adequately insured but a dire turn of events proves them wrong.

This article, sponsored by Zurich Australia, examines the problem of underinsurance and the ramifications it can have for your clients.

Australia is often regarded as the ‘lucky country’. Our standard of living, health care and social security systems all stack up well when compared to many other countries. However this sense of luck can lead to complacency, and complacency can often be detrimental.

Consider the summer just gone; vast areas of the eastern seaboard were on fire from September 2019 through to February 2020, as well as regions of south and western Australia. Structures, land, people and wildlife were severely impacted. According to a number of media reports, although the bushfire crisis may have been unprecedented, the number of people who found themselves underinsured was not. Sadly, it’s an all too predictable endnote to natural disasters around the country.

Mid-January 2020 estimates of damage from the catastrophic fire season included[1]:

  • Approximately 18.6 million hectares burnt
  • 9,352 buildings destroyed, of which 3,500 were family homes
  • 34 fatalities and many more injuries.

Farmers lost expensive equipment and kilometres of fencing, and a large number of businesses were directly or indirectly impacted; if they weren’t actually burnt, many lost custom at their peak revenue period of the year.

Insuring material assets

Estimates of the economic costs of this season’s bushfires may vary, but there’s one thing the myriads of reports have in common: it’s a large number, running into billions of dollars. Thousands of Australians have found themselves underinsured in these circumstances.

Breakout box to side of text

“All too often the disaster of having your home and possessions razed by fire is followed by the disaster of realising by how much you are underinsured.”[2]

So, why are so many Australians underinsured when it comes to their material assets? There are a range of factors at play:

  1. In some cases, insurance needs are not regularly reviewed. Coverage that provided for a home to be rebuilt or contents replaced five or ten years ago is unlikely to be adequate today. The average cost of building a home in Australia in 2019 had increased 74.8% since 2003-2004[3]. Allowing for a countless variations arising from materials used, location, terrain and other factors, it does highlight the importance of regularly reviewing the cost of rebuilding.
  2. People commonly insure based on the market value of their home or business. Rebuilding following a natural disaster can sometimes incur additional costs that insuring at market value won’t protect against. As well as the cost of clearing the site, the introduction of building regulations to protect against future disasters can add a significant sum to the rebuild.

After the Victorian Black Saturday fires, the National Construction Code beefed up its requirements for building homes in areas at risk of exposure to bushfire; depending on the ‘Bushfire Attack Level’ (BAL), building to the revised code is has increased costs by 20%[4] or more, something that’s not always factored in when taking out or renewing insurance policies.

  1. For some people, it’s simply a matter of cost. The focus is on the affordability of the policy rather than coverage should the worst case scenario eventuate.

Underinsurance could have significant ramifications for your clients. They may still have a mortgage to service and need to access other investments to make ends meet. It may be a case of ‘starting again’ which can be financially and emotionally challenging for clients, particularly those closest to retirement.

Insuring money making assets

Small businesses account for 35 percent of Australia’s GDP, employ 44 percent of Australia’s workforce and comprise 93.8 percent of Australia’s total businesses.[5] Often referred to as the ‘engine’ of Australia’s economy, the importance of small business to the nation cannot be overstated.

As well as this broad importance, every small business is supporting one or more families. And yet, the underinsurance problem extends to small businesses too. It may that buildings or plant and equipment are inadequately insured. Raw materials or finished goods may not be appropriately covered, or there may be a failure to have appropriate insurance for the business’s key people.

Consider figure one, in which Zurich Australia calculates the odds of a business partner dying or becoming totally disabled.[6] This research demonstrates that key person risk is not only possible, it’s probable, increasing as the number of partners increases.

It’s important that clients understand the importance of adequate insurance for all assets important for wealth creation; be those the physical assets owned or operated by the business, or the people on which the business depends for its revenue generation and future success.

 

 

Insuring the most important assets – your client and their family

Life insurance is a vital part of the ecosystem that helps protect the financial, emotional and physical wellbeing of Australians. However, it too is an area in which Australians tend to be underinsured.

A Rice Warner report[7] estimates the insurance needs for 30-year-old parents with children to be:

  • eight times family income for life insurance
  • four times family income for total and permanent disability (TPD) insurance
  • 85 percent of family income for income protection (IP) insurance.

Unfortunately, the same report found that most Australian households have nothing like this amount of insurance.

Although it is estimated that 94 percent of working Australians have life cover – largely thanks to insurance in superannuation – Rice Warner estimated the median cover to be approximately $143,500, twice the median household income.

There’s a lower uptake of TPD insurance, with the amount insured significantly below the recommended four times family income – the median coverage is $99,500, which is less than one and a half times median household income. When it came to income protection, Rice Warner found only a third of the working population held it, with median coverage of just 36 percent of household income.

The results of inadequate insurance coverage can severely impact the lifestyle and financial security enjoyed by your clients and their dependants in the event of an accident, illness or death. This was examined in detail in a 2018 report published by Zurich Australia, examining the cost of care in Australia [8]. The study, conducted in conjunction with Oxford University, revealed the extent to which Australians see themselves as ‘bulletproof’ and therefore have a low propensity to ensure adequacy of their life, TPD or income protection coverage.

In 2015/16, total health expenditure in Australia was $170.4 billion[9]. While the state and federal governments cover most of this, individual Australians (and their families) still accounted for around $30 billion of this annual cost[10]. Although advances in medicine and treatment techniques are improving survival rates across most conditions, this cost burden on those affected by injury and ill health can be crippling.

Consider these Australian statistics[11]:

  • Cardiovascular disease (CVD), which includes heart attack and stroke, is responsible for one death every 12 minutes in Australia
  • Over 600,000 Australians are living with coronary artery disease
  • One in every three Australian men and one in every four Australian women will be diagnosed with cancer by the age of 75 years; it represents 19% of Australia’s disease burden and is one of the most financially impactful
  • In 2014–15 there were a total of 483,673 injuries in Australia, equivalent to 1,325 every day.

While these statistics are chilling, without adequate insurance the financial impacts can be devastating. For example[12]:

  • The average lifetime cost for cancer sufferers can range from $20,360 to $95,460
  • Cancer patients using drugs not supported by the PBS can face bills of up to $5,000 per month or more
  • Each month there are 11 new quadriplegic events; the lifetime direct cost of quadriplegia can exceed $11 million
  • Around 20,000 Australians live with spinal cord injuries (SCI) and approximately 50 percent of those working prior to suffering an SCI will never return to the workforce.

Serious injury and illness is often compounded by indirect costs such as foregone income. This exacerbates the financial impact on families. A report[13] investigating the impact on carers of people who have experienced stroke found that:

  • 58 percent of primary carers of people with stroke and disability spend 40 hours or more per week in their caring role
  • 21 percent report a decrease in income due to their caring role
  • 24 percent incur extra expenses due to their caring role
  • 31 percent have difficulty meeting everyday living costs.

Underinsurance can create a significant direct and indirect financial burden for your clients. Whether it is insurance for material assets or their own lives and wellbeing, it’s important for your clients to consider the not insignificant costs associated with inadequate insurance.

Regular ‘health checks’ of all insurance policies should be an essential part of a holistic financial plan. Without adequate insurance, a client’s financial future could be derailed. And while not everyone will face catastrophic situations like those of this past summer, being prepared is the best defence in the event of unforeseen and unwelcome life events.

 

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[1] https://en.wikipedia.org/wiki/2019%E2%80%9320_Australian_bushfire_season
[2] https://theconversation.com/a-crisis-of-underinsurance-threatens-to-scar-rural-australia-permanently-129343
[3] https://www.budgetdirect.com.au/blog/cost-to-build-a-house.html
[4] https://www.tandfonline.com/eprint/VF2QKHQM2J3JQ3YRXZQZ/full?target=10.1080%2F00049182.2019.1691436&
[5] https://www.asbfeo.gov.au/sites/default/files/documents/ASBFEO-small-business-counts2019.pdf
[6] Zurich Australia, What are the odds? – July 2016
[7] Rice Warner, Underinsurance in Australia 2017
[8] Zurich Australia, The Cost of Care, September 2018
[9] Australian Institute of Health and Welfare 2013. Health expenditure Australia 2011–12. Health and welfare expenditure series no. 50. Cat. no. HWE 59. Canberra: AIHW, p. 117
[10] Australian Institute of Health and Welfare 2017. Health expenditure Australia 2015–16. Available from: www.aihw.gov.au/reports/health-welfare-expenditure/health-expenditureaustralia-2015-16/contents/data-visualisations
[11] Zurich Australia, The Cost of Care, September 2018
[12] Ibid
[13] Australian Institute of Health and Welfare (2013). Stroke and its management in Australia: an update. Cardiovascular disease series no. 37. Cat. no. CVD 61. Canberra: AIHW.

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