A NIBA Brokers' Guide - Issue 8

A NIBA Brokers’ Guide: The new business resilience

ISSUE 8 – MAY 2023

The NIBA Brokers’ Guides are brought to you through a partnership between Allianz Australia Insurance Limited (Allianz) and NIBA. We hope the knowledge of our subject matter experts, coupled with Allianz’s industry expertise, helps you and your clients prepare for the future. We welcome ideas for future subjects – please email your suggestions to editor@niba.com.au.

Welcome note

PHILIP KEWIN Chief Executive Officer, NIBA

PHUONG LY Chief General Manager, Commercial at Allianz

The new business resilience

The past few years have thrown challenges at businesses from the left, right and centre. From a global pandemic to natural disasters, geopolitical troubles, and supply chain difficulties to the high interest rate environment we’re all living through, there’s been no shortage of hurdles for businesses to overcome.

Looking back, we had a relatively straightforward run from the GFC to COVID-19, and maybe that lulled us into a false sense of security. It’s become abundantly clear that, in order to ride out whatever comes along next, we’ve got to be well-informed and well-prepared. While we don’t have a crystal ball to gaze into, we do have knowledge to access to prepare ourselves for the challenges that will undoubtedly lie ahead.

And having a thirst for that knowledge is important as brokers because having a solid understanding of what’s on the horizon is something that’s imperative to build a solid, robust and resilient business.

Things can change in an instant – and your clients need to be prepared.

Resilience in business is something that’s been talked about since the early days of COVID-19, and it’s important we don’t consign the notion to pandemic history.

Having a resilient business is vital – but by resilient, we don’t mean withstanding whatever is thrown. It’s more proactive than that – it’s about creating a business that has the knowledge and understanding to react in a positive way and can alter course swiftly and easily based on market and global conditions.

In this edition of our Brokers’ Guide, we’ve delved into a number of topics that we see on the horizon as having emerging issues and implications for businesses – and, naturally, for brokers, too.

From the risks that come hand in hand with new technologies and emerging property risks to business interruption in plant, machinery and vehicles, there are a whole host of challenges that are increasing in prevalence and importance – and which you and your clients need to be prepared for.

It’s a challenge, no doubt. But with the right information, insight and guidance, brokers can help clients chart a successful path through whatever lies ahead. It’s a serious opportunity for the proposition of ‘insurance broker’ to be truly elevated beyond writing and placing policies – firmly establishing risk advice as a business essential.

Things can change in an instant – and your clients need to be prepared.

Building resilience with emerging technologies

Embracing renewables is a critical step for a brand’s reputation, not to mention the environment. But with new technology comes emerging risks – pretty big ones – that are worth being aware of.

Solar energy, lithium batteries and electric vehicles have all been great achievements in sustainability, but they’re still far from perfect. Until safety measures catch up, brokers need to stay vigilant about the risks.

The two biggest risks? Fire safety and the scarcity of lithium.

According to data from Australian fire departments, more than 450 fires have been linked to lithium-ion batteries in the 18 months leading up to February 2023. It’s a problem that brokers need to be aware of.

“We’re getting battery fires that are burning down a factory because they either weren’t charged safely, the batteries were of unknown quality, or they weren’t being supervised when they were being charged,” says Chris Wood, Automotive Risk Manager and Technical Specialist at Allianz.

“And they’re not just taking out the business. They’re taking out the businesses around them. I was looking at an example the other day. It was $120,000 for the commercial property fire, but then we got a $1.9 million liability claim from the businesses around it. And that fire was caused by charging scooters,” Wood added.

If you’re working with a business that works with e-scooters, there are lots to think about.

“We give these products of questionable quality to kids, then they use them as kids do. We know rough use/abuse is one of the major causes of lithium battery fires. It’s called thermal runaway,” says Wood.

“If you’ve ever seen a thermal runaway, it has jet-like flames that chew out a couple of metres from each side, it gives off toxic vapour. And if it’s in a confined space, like a garage, it can fill the whole void up and then explode.

“The incidents are very low, so it’s not a frequency issue but it’s the severity.”

There are simple but important safety measures that brokers can pass on to their clients to minimise risk. Director of Steadfast Risk Engineering, Josh Giansiracusa, recommends all electric vehicle owners have a blue diamond sticker on their cars for quick identification.

“So that if you were in an accident, or if there was a certain emergency situation, responders will respond differently to an electric vehicle as opposed to petrol,” he says.

Changing the way we approach refuelling

It’s likely that in the next few years, our home and work garage setup will change, along with the safety needs of a home with an electric vehicle charging unit.

“Even a thermographic scan is very beneficial because what that does is picks up hotspots within your electrical system.

“So you can take imaging and it’ll give you a heat rating and say, ‘Oh, since you’ve installed the battery charger, your whole property’s electrical system seems to be lighting up like a Christmas tree,” Giansiracusa adds.

Safety is one aspect brokers need to consider – the other is the reputational risk to big businesses.

According to the Office of the Chief Economist, demand for lithium worldwide is set to rise by 40 per cent in the next two years, while Australia is looking to triple its lithium exports in the next 12 months. With all this demand, the risk of misrepresenting what a business may be able to achieve is real.

“When organisations are making representations as to the availability of lithium and supply from a particular prospect or mine, as always, proceed with caution,” says Dylan Moller, Senior Technical Claims Lead with Gallagher.

“With lithium in particular, there are a number of risks from the mining process, to the ability to reach targets (both in terms of availability and timing), and safety, with a risk of harm or misrepresentation.”

Risks of harm and misrepresentation are important considerations from an insurance perspective. However, one of the most topical risks at the moment comes from the crack-down on false or misleading representations on ESG and carbon targets (greenwashing). Companies may face accusations and charges related to greenwashing if they say they’ll reach certain targets and then don’t.

“There is always a difficulty in being as accurate as you can be. The critical matters are having the evidence to support those representations, not using vague language, and constantly reviewing progress,” adds Moller.

Moller believes there will be standardised expectations and regulations across sustainability and carbon targets soon to bring Australia in line with G20 and global initiatives, and it’s something businesses and brokers need to stay up to date with.

“Brokers can help their clients through understanding what their targets are and understanding the evidence that backs it, and to ensure the data, evidence and strategy behind checking these targets is really up to date, reasonable and achievable.”

Reaching net zero is commendable, but are we moving too quickly to meet those targets safely?

Basil Taylor, Manager at Allianz Risk Consultants Australia, says the real hazard is misunderstanding what each individual business needs to move to a sustainable model.

“If we’re going to do this net zero transition, what does that look like for my business when we think of turnover, supply chains, volume, and growth? And how can we do things smarter and differently, but at the same time, keep the business sustainable and profitable?” says Taylor.

It’s a Catch-22 because as customers seek out businesses with a sustainable footprint, there’s also a reputational risk of not going green.

“So, when we think of reputational brand value and brand awareness, how does that look for that business? What can they do and what shouldn’t they do to enhance their reputation?”

There’s a feeling this space will change a lot over the next decade, and sharing knowledge will be key to staying on top of those changes.

Taylor says, “I think that learning partnership is crucial and sharing experiences is key to that learning. So, sharing experiences for the broker and the client and the insurer and then taking that further to ask, ‘What did we learn from that experience?’”

Tips for brokers

1. Sustainability targets are important benchmarks towards a greener world, but we’re still playing catch up in the renewables space when it comes to safety and supply.

2. Lithium batteries are a fire waiting to happen, if not handled correctly.

3. A brand poses considerable risk to its reputation if it doesn’t look to reduce its carbon footprint. At the same time, businesses need to be confident in what they’re promising so as not to be seen as greenwashing.

4. Sharing experiences around these emerging technologies is the best way to protect everyone.

Property assessments come with a new set of risks: how should brokers and businesses prepare?

Tips for brokers & business

1. Take steps to thoroughly familiarise yourself with the product and understand its unique risks. Be aware of the potential for things to go wrong and the specialised response methods that may be required.

2. A ssess and review expected service life, safety data, manufacturer’s service conditions and maintenance guides. Be sure to keep an eye out for any product recalls.

3. With new technologies comes a need for continuous awareness-raising campaigns and staff training.

4. A comprehensive, tailored and site-specific approach to insurance is the key to successfully managing the risks associated with emerging technologies.

As new technologies and business innovations take hold, carrying out comprehensive and tailored risk assessments is becoming vitally important for building resilience and effectively responding to – and limiting – losses from incidents and accidents..

When it comes to property risks, claims analysis by Allianz shows that fire remains the largest single cause of business interruption and corporate insurance loss.

Ageing buildings and infrastructure, human error and lack of training have long been identified as contributing factors, but new and emerging risks such as lithium-ion batteries, solar power and energy storage systems are now also contributing to fires and other property-related risks.

We take a look at what brokers and businesses need to know and pass on some practical risk mitigation tips.

Lithium battery risks

Lithium-ion batteries in the workplace are becoming more and more common – they power mobile phones, tablets, electric vehicles and other equipment.

The fact that they’re incredibly compact and have such a high storage efficiency, unfortunately, also makes them vulnerable to runaway overheating when there’s a short or damaged cell. The potential for fires, accidents, property damage and business interruption is a real concern.

Basil Taylor, Manager, at Allianz Risk Consulting Australia, says rechargeable lithium-ion batteries are different from regular lithium batteries. The former are especially risky and their use calls for careful storage, maintenance, and supply chain management.

“Taking a site-specific approach, businesses need to identify unique risks associated with their particular locations and implement rigorous processes to effectively manage and mitigate the risks,” he says.

“Educating yourself and your staff on safe use, charging, and storage is key, as is reviewing your business insurance coverage to deal with the risk.”

Kenji Hosaka, Risk Manager at Allianz Risk Consulting Australia, says that awareness needs to extend to businesses of all categories from SMEs to heavy industrial worksites.

“Insurers and brokers should ask their clients about their practices and plans for battery storage and charging activities and know the unique risks,” he says.

“We’re not talking about a ‘normal fire’ here. The sorts of fires generated by thermal runaway incidents can be particularly severe and hard to contain.”

Alarmingly, lithium-ion batteries can even reignite after they have been extinguished. Awareness, training and having the right sorts of extinguishers on hand are critical.

Solar power and energy storage system risks

With clear environmental and energy cost-saving benefits, the demand for solar energy is growing in the commercial sector alongside its increasing popularity for householders.

As Hosaka points out, sustainability goals and governmental requirements are also playing into the demand. “Australia is targeting an 82 per cent share of renewables across the energy grid by 2030 and reducing the use of fossil energies is a big part of this.”

As with any sophisticated energy system, however, solar poses unique risks and insurance considerations.

Substandard workmanship, environmental impacts to a cell or water infiltration can lead to electrical fires in a roof or inverter and can result in significant damage to a building and its contents. Weather-related risks from wind, storm or hail damage should also be considered.

When it comes to managing solar panel risks, quality and oversight are key according to Taylor. He says this involves, “Having adequate manufacturer warranties around the system and setting it up by an approved contractor. Also making sure there’s a solid process around installation and supply. And, finally, you need to ensure that maintenance and support of the solar system are adequate.”

The importance of tailored solutions

When it comes to weighing these new business and property risks, it’s important to examine your unique circumstances and determine what’s really relevant to you, rather than relying on an industry-wide approach to assessments.

Having an informed broker on your side can help you evaluate insurer recommendations and justify necessary adjustments. And with accurate information at your disposal, you can save both time and money when renewing a policy.

“Insurer, broker and client need to come together to work out the best and most customised approach,” Taylor says.

“This could include education to increase product awareness, having one of our SMEs attend the site and host a training session or help you partner with a third party to find the best solution to managing risk.”

Business, interrupted

When a business stops producing at capacity, even for a short time, the financial flow-on can potentially be devastating. For brokers, it’s important to understand your client’s plan B to get a clearer picture of the risk profile – and to help them build resilience.

Recent supply chain issues first started alongside the COVID-19 pandemic, but the end of lockdowns has not seen supply and demand even out.

In the plants, machinery, and vehicles sector, waiting for parts is still a major pain point and can cause significant disruption to your client’s business if they don’t have strategies in place.

“It’s important to understand your client’s business and its business continuity plan,” says Kenji Hosaka, Risk Manager at Allianz Risk Consulting Australia.

“So if one supplier is out, then what can we do? And often we do have options to get alternative suppliers and alternative products.”

Brokers can help clients minimise risk by negotiating long indemnity periods, which can offer businesses support when they need it most.

Head of Interruption Underwriting Agencies, Christopher Connolly, says brokers should ensure clients have a minimum cover of two years, with some businesses needing three to five years of cover.

“I’m insuring your turnover, and if you’re not back up and running in 12 months, the policy finishes and then you’re left out on a limb,” he says.

Vehicle supply

Since Australia stopped making vehicles in 2017, we’ve become more reliant on vehicles and parts from overseas.

There are several reasons for the supply chain hold-ups of late, but this one might surprise you.

“It’s gone from issues with COVID-19 to microchip shortages, and now for Australian vehicles supply, it’s bugs,” says Chris Wood, Automotive Risk Manager and Technical Specialist from Allianz, “Bugs and grubs.”

“Because of the other supply chain issues, the vehicles have been sitting out in fields around the world, and what customers have discovered is that a lot of the cars have been found with bugs and other things attached to them.

“In Australia, we’re pretty good at protecting our agricultural industries, so what happens is every 100 vehicles they do an inspection, and if they find any bugs those 100 vehicles have to be quarantined.”

It’s an interesting example of how everything in the global supply chain is inherently linked, and these relationships can have ripple effects far and wide.

New risks in renewables

You don’t have to look far to find appliances, tools and machinery run on electrics. Specifically, lithium batteries that can be powered by the sun. These renewable energy choices mean running costs can be reduced along with their carbon footprint, which is a great thing, but there are risks too.

“When we think about installing these electrified solutions, we are talking about minimising cost, and coming up with a contingency plan, “ says Hosaka.

“So, if the grid is out, we can still maintain the business by using batteries. And if we’re installing solar panels, we still have the option to go offline so we can run the factory.”

As is the way with new technologies, a broker’s best defence is knowledge.

“Know the client’s business, know their products, know their services, know their activities,” says Hosaka.

“So, if the client is thinking about using lithium batteries, electrified systems or energy storage, then they can contact the underwriting team or insurance company, and they have lots of knowledge about managing those risks and pricing them.”

Staff shortages set to continue

Staff shortages are intensifying the business interruption caused by supply issues.

Even when everything is up and running, retail and hospitality, in particular, are often not working to full capacity because they can’t find the staff. And that reduction can be detrimental, especially in this financial climate.

“And so not only is there inflation and people aren’t coming [to restaurants and shops], but then you can’t operate your restaurant or retail at full scale because you can’t get the staff to support it,” says Connolly.

“This has been going on now for two years, and it doesn’t look like it’s going to change.”

His advice? Brokers must be careful not to underinsure.

“It’s a commercial decision for the business. Generally, in the market they have to insure the full values otherwise, they’ll penalise themselves, and that’s where it hurts.”

Communication is key

Getting insurance coverage just right in the current financial climate is challenging – and the best way for brokers to help their clients is to talk with them.

“I think now, more than ever, is a great time to engage in conversation with your customers. There’s never been a better time to talk more about the business and what the business depends on,” says Wood.

Tips for brokers

1. Long indemnity periods of two-five years will help cover turnover.

2. Diversifying where and how a business imports its products can help to ensure productivity.

3. New technologies in the renewables space have helped profit margins but there should be a contingency plan to keep businesses running if renewables fail.

4. Consider the impacts that staff shortages are having in reducing the overall level of productivity and exacerbating business interruption caused by supply chain issues.

5. Communication between client, broker and insurer helps to educate clients about potential risks.

Building resilience

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CPD Entitlement

NIBA Members can gain ½ a point per hour engaged in reading the substantive content of an issue of A NIBA Brokers’ Guide. For more information and to download a CPD reading record sheet, visit www.niba.com.au/unstructured-cpd. Members can claim a maximum of 7.5 points annually for unstructured training (professional reading and individual research activities).

Allianz and NIBA give no warranty and make no representation that the information contained in this publication dated May 2023 is, and will remain, suitable for any purpose or free from error. To the extent permitted by law, Allianz and NIBA exclude responsibility and liability in respect of any loss arising in any way (including by way of negligence) from reliance on the general information contained in this publication or otherwise in connection with it. The contents of this guide are protected by copyright. © Allianz Australia Insurance Limited (ABN 15 000 122 850) and National Insurance Brokers Association 2023.