In March 2023, the RBA raised its cash rate by another 0.25%, taking it to 3.6%. This is the tenth consecutive rate hike since last May, totaling 350 basis points, making it the biggest tightening cycle since the 1980s.
ANZ have forecast the RBA cash rate to peak at 4.1% in May 2023, up 25bp from their previous forecast of 3.85%.
So, what does the rising interest rates and inflation mean for Australian businesses?
Higher employee costs
Low unemployment coupled with inflationary pressure leads to higher wages.
Higher cost of goods
Supply chain challenges and the increase in demand during the post-Covid low-rate environment means price increases to maintain margins.
Uncertainty around future trading conditions
Higher costs will eventually curb demand, leading to a reduction in discretionary spending.
Tighter restrictions from major banks
Reduced borrowing capacity and potentially reduced banking facilities.
As impact starts to take effect, many businesses may:
- Reduce investment in projects and expansion plans;
- Save costs by reducing staff headcount, close site/offices and/or reduce insurance cover;
- Utilise finance products where possible instead of cash reserves; and/or
- Worst case scenario – face tough decisions around survival.
Relevance for insurance brokers
An increase in insurance premiums is only compounding the impact that rising interest rates and inflation are having on Australian businesses. The following are potential areas of concern for Insurance Brokers.
Underinsurance risks
Clients may elect to reduce their insurance coverage due to affordability, leading to exposures.
Aged Debtors Management
Delays in payment are likely as businesses struggle with cash flow management. This puts pressure on insurer credit terms, increases the administration for your staff and delays your commission revenue.
Increase in policy cancellations
The worst-case scenario as businesses cut costs to survive.
How a premium funding solution can assist:
- By breaking down an annual lump sum insurance payment into more manageable monthly repayments, your clients can free up their cash flow to use in other areas of their business, relieve some financial pressure and reduce the risk of underinsurance due to affordability.
- Premium funding solutions are a fixed rate loan, which means clients are protected from interest rate fluctuations over the course of a premium funding contract.
- Interest repayments may be tax deductible for the client. They should speak to their Accountant.
- A premium funding solution will not impact any finance or banking facilities your client may already have in place due to the insurance policies acting as security for the loan.
- You as the broker benefit from the certainty of cover for your client and a reduction in debtors administration and commission payment delays.
We encourage our brokers to discuss an Arteva premium funding solution with all of their clients so that they can benefit from the assistance it can offer.
