Soaring insurance costs push Australian SMEs to the brink

Soaring insurance costs push Australian SMEs to the brink | Insurance Business Australia

SME

Soaring insurance costs push Australian SMEs to the brink

Non-profit organisation outlines measures to address rising costs

Small and medium-sized enterprises (SMEs) in New South Wales are facing increased financial pressure due to rising insurance premiums, with a broader trend suggesting a rise in business failures across Australia.

According to a recent survey by Business NSW, 13% of SMEs said their business viability is at risk due to escalating insurance costs.

Business NSW CEO Daniel Hunter said the economic pressures are becoming unsustainable for many businesses, with rising insurance premiums playing a significant role.

“The current economic environment is slowly boiling businesses, and the cost of insurance is the number one culprit turning up the heat,” he said.

He said that numerous businesses are being forced to scale back their insurance coverage due to affordability issues. About 22% of SMEs are now underinsured, and 12% have opted to go without non-mandatory coverage, further exposing themselves to risk.

If these insurance premium hikes persist, more SMEs would be unable to continue operating, leaving only the largest corporations, according to Business NSW.

“This is bad for innovation, bad for our communities, and bad for NSW,” Hunter said.

encouraging SMEs to shop around for more competitive insurance deals
pushing for faster reforms to the NSW Emergency Services Levy to ease the burden on premiums
ensuring government contracts are adjusted to match actual insurance needs so businesses are not overpaying for coverage
establishing a co-funded training program to help SMEs better manage risk and make informed insurance decisions
expanding business and consumer input in the Hazard Insurance Partnership project to help bring premiums down within three years

Hunter also highlighted that NSW’s GDP data showed a slowing economy, exacerbating the struggles of industries such as tourism, which are dominated by smaller, family-run businesses still recovering from the pandemic.

The report forecasts that Queensland will experience the highest overall rate of business insolvencies, while Western Australia will likely see the sharpest rise in failures compared to the previous year.

High-risk areas identified by the BRI include regions like Western Sydney and South-East Queensland, where businesses are contending with high interest rates, declining household incomes, and steep commercial property costs. In Queensland, rising construction costs are adding further financial pressure, particularly for businesses looking to expand or manage rent increases.

On the other hand, regional areas are expected to face fewer business failures, partly due to lower commercial rents and more stable local economies, particularly in agriculture. These regions benefit from reduced competition and steady demand for essential goods, which shields them from some of the economic volatility impacting other sectors.

The BRI report predicts an overall rise in business failures across all states, with Queensland projected to have the highest failure rate at 6%. Western Australia is expected to see the largest increase in failures, while Tasmania is anticipated to have the lowest rate at 4.76%.

CreditorWatch CEO Patrick Coghlan attributed the rising business failure rates to increasing costs, higher interest rates, and weakening consumer demand. While upcoming tax cuts could provide some relief, he warned that conditions may not improve until the Reserve Bank of Australia (RBA) starts cutting interest rates.

Business activity and legal challenges in Australia

The BRI also reported a substantial decline in business orders, with the average value of invoices dropping by 51.5% year-on-year as of July 2024. This decline reflects a broader slowdown in consumer demand and sluggish retail sales, which are further constraining business revenues.

At the same time, legal actions against businesses have surged, as creditors increasingly seek to recover debts. Legal proceedings have now exceeded pre-pandemic levels, underscoring the growing financial challenges faced by many businesses.

CreditorWatch expects these conditions to persist until at least early 2025, when the RBA may consider lowering interest rates. Until then, the economic pressures from rising costs, high interest rates, and reduced consumer spending are likely to continue straining businesses, with SMEs particularly vulnerable to these ongoing challenges.