Is insurance worth it? Why your insurance is actually saving you money.

Is insurance worth it, can’t i just self insure? Insurance is a love to hate and hate to love industry. Below I’m going to break down the fact that your insurance is actually saving you money and why it should be an expense that you actually want to pay. I’m certainly not intending to say that you need to buy every single insurance policy that relates to your business in fact, I’ll say quite the opposite because the best way to save money is to find your perfect balance on risk.

Insurance is built on big data that breaks down statistics that X% of people will have some form of loss to a particular event. We are then all categorised into to further risk profiles based on; the work that we do, where we are located, who’s involved in our business and how long we have been operating. All of these things contribute to an increase or decrease in the overall risk percentage. That percentage is then presented into a portion of premium that needs to be paid should you wish to cover particular events.

APRA which is the overall governing body of the insurance industry release their statistics of claims frequency annually and the most recent release shared the following information.

CTP insurance which is the compulsory motor insurance that we pay with our registration has an 84% loss ratio. That means that out of the premium paid to the insurers 80% was paid out in claims and 20% was the final figure the insurers could rely on as income.

On a commercial focus the likes of Public Liability insurance had just under a 56% loss ratio. Professional Indemnity had a 67% loss ratio whilst employers liability revealed a figure as high as 73%. Commercial property claims currently run on a 10 year average of 77% with the year 2020 having a huge year tipping a 92% loss ratio. So if only 50% of the money is paid, is insurance worth it?

Now that we know these numbers we can specifically tailor this to your business. We have sourced some data which outlines the average claim costs for personal injury related to workplace related incidents as between $50,000 – $350,000. Finding the average claim payout amount for the other policies listed above is extremely difficult and most of the data is held tightly by the insurers and not usually publicly released however, I would suspect that the other insurances are just as high. When you consider taking into consideration all of the consequential losses that occur and presented in a claim, claim costs reach half a million dollars very quickly.

Lets break down the numbers for you, say for example and using the figures above the insurers have advised that 50% of the premium that they collect is paid out on your Public Liability insurance and even higher for Professional Indemnity occupations. For this example, i will just use an occupation which typically doesn’t provide advice and therefor doesn’t require Professional Indemnity insurance. For this example, lets go with a plumbing occupation. A plumber will typically have a Public Liability insurance, tools of trade cover to cover tools that they take on-site and a motor vehicle. Their average premiums would typically look something like this:

• Public Liability Insurance $1,200 – $2.500* per year depending if they do domestic or commercial. (*Please note that to generate a premium there are multiple factors to take into consideration, these figures were calculated by reviewing the current clients that we currently have and created a range for example purposes)
• Tools of Trade Insurance $400 per year (covering $20,000)
• Motor vehicle: $1,000 (round numbered premium)

If you would like to get a very simple breakdown of what insurance do i need than you can read our blog post or get a copy of your free risk review.

Lets consider that this Plumber is in the early stages of his career and is 28 years old and expected to work for himself until age 65. Based off current figures, he will pay 37 years of insurance premiums where the Public Liability insurance amount for 37 years would be $44,400 – $92,500. We have not included any form of CPI increases as we believe that this would be voided with the claim costs also increasing. Based off the insurers estimation, of the premiums collected $22,200 – $46,250 would be paid out in claims. However, the average claim costs under a Public Liability insurance policy is $50,000 – $350,000 leaving a significant difference in the premium collected.

Is insurance worth it if i can just save the money myself?

So how is this possibly saving you money? Well essentially, if you saved every single dollar that you would need to pay in insurance premiums and “self-insured” than you would just short of being able to pay the bottom end of the average claim value. If you were paying the higher premium than you would land within the range however, you may still be up for some extra costs depending on the quantum of the claim.

So if i can potentially self insure and cover the potential costs of a claim, how could this be possibly saving me money? The example above, takes into consideration you have only 1 claim in 37 years. For trade occupations this is typically unheard of and the frequency of claims would typically be atleast 1 claim every 10 years potentially even more if you’re having a bad run. Your claim costs could also be signficantly higher depending on the claim. For example, we have seen a pretty big increase in claims for plumbers who work on apartment buildings with water damage spreading across multiple floors.

So what’s the overall outcome of this? You need to have insurance in place. If it comes down to cost, what I suggest most of my clients do is work out their average insurance premiums across the year as a percentage of their turnover. Using the example above, $2,600 would be the annual premium on the lower range figure and this would be based off a turnover of about $200,000. This premium would equate to 1.3% of your turnover. Take 1.3% on every single invoice that you write out to a client and put it in a seperate insurance account and be ready to pay your premium when it comes around next year. So, is insurance worth it? You tell me.