Some businesses have no insurance. Photo / 123RF
Some businesses have no insurance at all, while others have reduced their coverage to keep their doors open.
The news comes as cyclone-impacted retail businesses estimate, on average, the adverse weather event has cost them $55,000 each, and the Insurance Council of NZ warns it “could be the end of your business” if owners are not covered.
Retail NZ chief executive Greg Harford said the price of insurance had been increasing substantially over the past few years and was becoming a “barrier to businesses accessing insurance policies”.
It surveyed members affected by the cyclone, and the results show that 37 per cent had no insurance, 11 per cent have full insurance to cover all costs, while 53 per cent had insurance that would cover some costs.
He said insurance was an important part of running a business, as it provided cover in the event of unforeseen circumstances.
“This is not just buildings and premises – business interruption insurance can provide cover in the event of significant external disruption. For example, in the event of a natural disaster or power cuts, some insurance policies will cover a loss of sales.”
This year was also proving to be challenging, and sales were down 4 per cent in the last quarter of 2022.
“We are hearing that there are significant pressures facing the sector as we move into March. Overall, our members in cyclone-affected areas are reporting that sales are down 20 - 30 per cent, while some other parts of the country are down 10 - 15 per cent.”
Across the sector, retail businesses made an average net margin of under 4 per cent, so these declines in sales tipped businesses from being marginal to making losses.
“This is a particularly bad time for retail, given that many businesses have taken on substantial debt to survive Covid and are also facing higher wage bills, higher costs from suppliers and reduced sales incomes.”
Customers were feeling “less wealthy” and spending less because the value of their homes had decreased, while businesses directly impacted by the cyclone said on average it had cost them about $55,000.
“It is too early to say whether there will be casualties, but there are some significantly challenged businesses, especially in the areas affected by the cyclone, and some may not be able to recover.”
Tauranga Business Chamber chief executive Matt Cowley said a growing number of small business owners were forced to reduce their insurance coverage to remain viable.
“They have prioritised insurance that is required by their landlord or bank if they have borrowed funds, but that leaves them exposed in other areas. The cost of everything has increased over the past few years. That means insurance has increased because the cost of replacing items has also increased.
“Even something as minor as a windshield in modern vehicles often has a lot of sensors and requires specialist installers.”
Colliers Tauranga managing director Simon Clark said the rising costs of insurance could influence the price of a commercial lease.
“Insurance is an operating cost usually paid for by the tenants, so it would likely raise the overall cost to tenants.”
Some properties in lower-lying areas might become uninsurable, which was a real concern.
“But I think the raised cost of insurance will have an effect on the viability of some businesses going forward - particularly in the retail sector - which are having harder times.”
The industrial market was still very strong, with still a lot of activity from business owners wanting to buy their own premises or land to build new buildings. Retail and office investments were less desirable to buyers due to slower tenant demand and less rental growth over time.
It was a similar situation on the leasing front, with a lack of vacant space and rental rates still rising due to the cost of construction of new buildings and the limited supply, he said.
Bayleys Commercial Tauranga sales manager Mark Walton said rising insurance costs impacted the occupancy costs for businesses and put pressure on margins and the ability of businesses to make profits.
“Ultimately, these increasing costs will need to be passed on to consumers. The rising costs are being felt by businesses in the region, and it has been a particularly tough couple of years.”
In most cases in commercial leases, insurance premiums are an opex cost passed on to tenants (businesses) at a time when a lot of businesses are struggling with rapidly rising costs.
“The commercial property sector has already been hit hard, with rising costs for occupiers such as the Tauranga City Rate increases driven by the lift in the general rate differential for commercial and industrial properties which came into effect in July 2022, with significant impact on industrial properties, their rates increasing in the order of 30 - 50 per cent within a 12-month period.”
Books A Plenty co-owner Sheree Brown said in her opinion, insurance was not negotiable, even though she would like to cut costs.
The business had a leak in the roof last year and lost about $3000 worth of stock, and insurance gave her peace of mind.
A Tūtānekai Gifts & Souvenirs spokeswoman said business insurance had increased “hugely”, although the building itself was covered through her lease.
Restaurant Association of New Zealand chief executive Marisa Bidois said some affected businesses were still in the thick of making applications, and insurance companies were just starting to get a picture of the overall amount of claims and the impact on costs going forward.
“With the recent weather events, this was not the start to 2023 we were looking for.”
A recent survey by the Restaurant Association showed that 92 per cent of respondents were impacted by the recent weather.
Sixty-five per cent had been forced to close their doors and 25 per cent remain closed.
“The business support package is very welcome in getting businesses back on their feet. Many are also relying on the kindness of friends and are doing all they can to work with the insurance companies and landlords to get back [to being] operational again.”
Outside of the flooded regions, the single biggest issue facing the industry continued to be a critical skills shortage, she said.
An Insurance Council of NZ spokesman said it was still calculating data for the Auckland Anniversary weekend floods and Cyclone Gabrielle, but each event individually would have qualified as the largest climate-related insurance event to impact the country.
“We don’t yet know which is larger. The overall economic costs, including much more than just insurance, will clearly be many billions of dollars.”
He said it was a “terrible time for many businesses”.
"Insurers are busy working through claims and doing what they can to help get people back on their feet."
All of New Zealand’s insurers made their own decisions about risk and pricing, but a raft of issues had beset the sector since the pandemic began.
These included significant supply chain problems, high general inflation, extraordinary building costs, climate-related extreme weather events which reached costs of around $350 million in 2022, and a very difficult reinsurance market.
“The cost of this cover has been going up as global reinsurers face record climate-related losses, which last year included Hurricane Ian and major flooding in Australia.”
One of the key things about insurance is it only transfers risk, and does not reduce it - where the risks are high, it could increase premiums or make for higher excesses.
However, if action was taken to reduce risk, such as investment in sufficient resilience measures - perhaps flood defenses that actually reduce risk - then that pressure could be reduced.
“There is local precedent for this in Christchurch related to flooding, which saw very high excesses for flooding which were wound back after the city completed a major programme to reduce that risk. That did a lot to both keep insurance available and relatively affordable.”
Not having any insurance or being undercovered “could mean the end of your business”.
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Source - Insurance Council of NZ
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