Hands up if your insurance premiums increased this year?
Okay, so that’s everyone.
There have been a lot of national and international disasters over the past few years and it is no surprise that the cost of insurance has risen. As easy as it may be to determine why prices have risen, it does not really make it any easier to pay the bill.
Let’s look at risk and then move on to some tips to understand how to get better value for money from your insurance.
Assessing Risk
Risk is a combination of likelihood and consequence.
Likelihood is the chance something will happen; consequence is the outcome.
Using a risk matrix can help us take the guess work and emotion out of looking at risks in our businesses. It is important to realise that business risk for agricultural business can vary every year.
A few bad seasons, or a major growth phase, or a succession period may mean that that was once a minor consequence for your business is now quite major. Good times and business growth may have the opposite effect. That’s why the consequence categories in this table are not in tens or hundreds of thousands of dollars. The losses that each business or individual can endure varies, so think about what the numbers are for you.
How Insurance Works
Insurers know the risks better than anyone. Premiums and excess and conditions are placed on items or events that are more likely to happen.
If we think of a shed filled with hay, it has a higher likelihood of burning down than a shed full of machinery or grain and will have a higher premium. If you seek insurance on stored hay you will be expected to not store machinery in the shed with the hay, monitor the temperature of the hay and ensure the shed is watertight. These actions will reduce the likelihood of the shed burning down. You will also pay a higher premium which reduces the financial consequence of the loss, for the insurer!
The consequences for the loss of hay are different for the farming operation, and are greater than just the cost of the asset. In our hay example, there is the time taken to deal with the fire, cleanup costs, the time taken to source additional fodder, delays to other work causing loss of income, a possible need to reduce stocking numbers or sell stock earlier or at lighter weights.
The best way to reducing our risk is to reduce the likelihood of something occurring. This has the potential to reduce our insurance premiums and most importantly reduce the chance of something going wrong in the first place.
Getting Value for Money From Your Insurance
1. Don’t under insure In reality, even if you are fully insured, you are under insured. Always consider the cost of excess, replacement upgrades, your time associated organising replacement, rising prices/functionality down time etc. Don’t under under insure your most important assets
2. Seek a Higher Excess How often to you claim on average each year? Ask your insurer for a quote based on a higher excess and a reduced premium and do your sums.
3. Don’t insure things you don’t need If you are not using an asset is it worth insuring? Have you purchased infrastructure with a property that you don’t need and won’t replace and may not have paid extra for? Don’t insure items that are not maintained, you won’t be able to claim. Re assess items with falling values against premium costs.
4. Don’t be loyal – it does not pay There is no premium reward for loyalty There is no chance of an increased payout for loyalty – assessment is often undertaken by a third party independent and is based on a legal contract (your policy) rather than your perception of a moral obligation based on a relationship. Test the market every three years or ask your broker to Ask for a discount if you do prefer to stay with the same insurer Seek quotes annually for crop insurance, premiums can change quite significantly year on year based on prior years claims history.
5. Examine your payment terms Match your payments to your cashflow, this might be annual, quarterly or monthly. See if a discount is offered for one annual payment Determine if it is worth it? Compare to overdraft rate or deposit rate. Set up automatic payments to reduce admin time and cost.
WHAT CAN YOU DO QUICKLY TO IMPROVE YOUR FARM INSURANCE
If you have 10 minutes
Request a copy of your policy in condensed format from your insurer or broker – put a note in your diary so you follow up. Get your policy and check values on replacement costs of houses and main sheds Check that loads are covered if you are carting your own livestock, fert or grain
If you have 1 hour
Run your eye over the list of items your insurer has provided to you. Do a check on your machinery list. Take a realistic look at market value and the cost vs premium equations. Consider the pros and cons of livestock insurance, get a quote.
If you have 1 day
Sit down with another farm business members (family, staff, advisors etc) or on your own and consider the biggest risks to your farm business future income and assets. Consider how the likelihood of the event occurring could be reduced. Highlight things that need to be done that are not being done. Seek a re – quote on your general farm insurance. This involves reviewing your current list, removing pricing information and using a broker or approaching insurance companies individually.
The Department of Primary Industries Rural Recover Program produced a webinar that I presented on business risk and insurance, along with Hamish White of Hamish White Consulting. You can watch it here.
Our Farm Budgeting Masterclass is full of hints and tips to save money on farm without reducing productivity. Check it out here
