News

23 Jun 2016

Beware the consequences of Under Insurance under a weaker Australian Dollar

The recent slide in the value of the Australian Dollar and the volatile economic climate delivers potentially serious consequences for Australian businesses, that are unaware that insured values of their imported assets may have dropped substantially below present day replacement or repair costs.

Cutting across the entire spectrum of Australian business including electronics, machinery, plant and equipment, the recent drop in the value of the dollar which recently touched a low of USD 0.72c (a decrease of 38% since 2013) has seen the replacement costs for imported assets rocket upwards, creating potentially costly pitfalls for those who are unprepared.

Although fluctuations in the dollar are nothing new, the current reduction in value is something clients should be mindful of, particularly when assessing reinstatement values of stock, contents, plant and machinery.

Whilst the value of the dollar has fluctuated in the last 10 years, these changes were not as severe as those most recently experienced. Clients have therefore been able to use the annual renewal cycle to compensate for any annual inflationary influences and change their sums insured accordingly.

In addition, allowances for currency fluctuations are typically allowed for within the underlying insurance policies which typically compensate for a variance of between 15 to 20%.

The major impact clients will experience is the replacement cost of imported goods, plus associated costs of maintenance as replacement and spare parts increase in value.

Industries, that relying on the importation of consignment goods using the dollar as a base, have seen their cash flows hit. These businesses have had to exercise caution with sales to clients because of the dramatic increase in their stock acquisition prices.

At a micro level, even small to medium enterprises and retailers in local malls will not be exempt from the insurance aspects of the dollar’s slide.

These days every business has computer equipment, office machinery or purpose-designed machinery. For smaller business the potential for unexpected costs related to equipment failure or replacement could be critical.

Although the impact on business needing imported equipment will vary according to the currency in which the purchase was negotiated, the businesses most likely to feel the pain of adverse forex levels are those who bought their equipment a few years ago.

Equipment imported from Europe three years ago needing to be replaced could cost up to 40% more. Unfortunately, the older the equipment the more likely that maintenance and purchase of spares will be required which is something that also has to be catered for with appropriate financial planning.

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