If you own a trade business, how do you know how much you should be budgeting for your business insurance?
We’ve crunched the numbers from thousands of trade businesses throughout Australia, and have come up with some great data on what business owners are actually spending.
Where do you start?
We speak to some clients who think their $600 insurance renewal is too expensive, and others who don’t blink when we quote them $20,000+.
Looking at the dollar figure is quite pointless though. A business turning over $100k a year will obviously have a completely different cost to a company turning over $10m a year.
So if we’re looking for a more relevant figure, the cost of your insurance as a percentage of your annual revenue would be the one to look at.
To make this work we’re going to look at a range of different Trade Risk clients of different sizes, and see how their insurance cost stacks up. We’ll start off at the smaller end and move our way up.
This should give you a rough idea of how much you should be budgeting for your own trade business.
Keep in mind that all clients have different attitudes towards their insurance, which will impact upon their insurance spend.
Some clients want complete protection and are willing to pay whatever it costs. Other clients may case less about insurance, and only want the minimum requirements for their licence.
If you’re paying more for your business insurance than our averages, it doesn’t necessarily mean you’re overpaying. It more likely means that you have more comprehensive cover.
Likewise, if you’re paying less for your business insurance than our average, it doesn’t mean you’re getting some amazing deal, it probably just means you have less coverage in place.
But either way, these figures should still give you a great starting point for how much you could expect to be budgeting for your business insurance.
Small trade business
Revenue: $50k to $150k
Although we look after businesses with multi-million-dollar revenues, we also look after thousands of sole traders with revenues of $150k or less.
This type of client will typically only have public liability with us, and potentially tool insurance.
Some clients in this range will have personal accident and/or vehicle insurance with us, which will drive up the average.
Assuming we’re talking about a standard trade, not working in any hazardous locations (such as mines and airports) and without an adverse claim history, their numbers might look something like this:
Average revenue: $97.2k
Average insurance spend: $1,010
Percentage of revenue spent on insurance: 1.09%
If you’re paying less than the average, it’s likely that you’re in a lower risk trade and not undertaking any work in hazardous locations.
It’s also likely that you have a relatively low level of insurance in place.
If you’re paying more than the average, it’s likely that you’re in a higher risk trade (or working in higher risk locations), or simply have a more comprehensive level of insurance in place.
Small – but growing – trade business
Revenue: $150k to $500k
This next band looks at trade businesses with revenue between $150k and $500k. Typically, this is a business that has employed its first employee or two.
Average revenue: $290k
Average insurance spend: $1,692
Percentage of revenue spent on insurance: 0.62%
You’ll notice that the percentage of revenue spent on insurance has actually shrunk as the business grows.
This isn’t because the business needs less insurance, but more so down to economies of scale.
Whilst your insurance cost (especially for public liability) is closely linked with your revenue, it doesn’t correlate exactly.
For example, if your revenue doubled from one year to the next your insurance would certainly increase, but it wouldn’t double.
Mid-size trade business
Revenue – $1m to $5m
At Trade Risk, what we’d consider to be a mid-size trade business would be anything from $1m to $5m turnover, which is quite a broad range.
At this point you’ve not only employed a number of staff, but might also operate from your own rented or owned premises, and have invested in your own plant and equipment.
Average revenue: $1.9m
Average insurance spend: $6,473
Percentage of revenue spent on insurance: 0.34%
It’s at this point that trade business owners will really start paying attention to those premiums!
When your annual insurance bill is only a grand or so, it’s often just another bill to be paid and move on from.
But once they start hitting $5k or $10k (or more) you start taking a lot more notice.
Some business owners will at this point start making this mistake of only looking at the premium amount without considering other factors.
They’ll complain that their insurance costs are increasing, without realising that as a percentage of their revenue, their costs are actually decreasing!
You might have gone from spending $1,000 to $6,000 a year, but as a percentage of your revenue, your insurance costs have dropped by two thirds. That’s huge!
So the lessen here is to focus on your insurance costs as a percentage of your revenue, and not simply as dollars.
Would you complain if your material costs when up by 50%, but your revenue increased by 150%? Probably not!
Large trade business
Revenue – $5m to $50m
What we refer to as a “large” trade business isn’t a big national construction company doing billions of dollars a year.
We’re looking at companies ranging anywhere from around $5m to $50m annual turnover.
Average revenue: $14.6m
Average insurance spend: $33,966
Percentage of revenue spent on insurance: 0.23%
Now we’re looking at some serious premiums, with some clients in this range paying in excess of $100k annually for their insurance.
But as you can see, the cost of their insurance as a percentage of revenue has deceased yet again.
When looking at these figures – and all figures in this report – it’s important to keep in mind that not all clients have all of their insurance with Trade Risk.
Some clients might have us looking after their public liability and tools, but have their vehicles insured directly through an insurance.
Or they might have us looking after their business premises, but another broker looking after their liability and vehicles.
So the percentages in this report are by no means perfect, but in covering thousands of clients it gives a very good starting point.
What does Trade Risk pay?
Whilst not necessarily relevant to a trade business, we thought it would be interesting to look at what percentage of our own revenue we spend on business insurance.
We haven’t included workers compensation, but we don’t look after workers compensation for most of our clients anyway, so that keeps the comparison more relevant.
Our figure comes in at 2.1%.
And we’ve never claimed on any of our policies in 12 years of operation!
That is multiple times higher than the typical Trade Risk client. A large part of it relates to our professional indemnity insurance, which protects you – our clients – if we get something wrong.
Like all of you we’d love to be spending less! But it’s good to know we’re all protected if something goes wrong, which is the whole point of insurance.
Using this information
The figures we have used in this guide are averages. They give you a great starting point, but there are so many variables to take into account.
Whilst knowing that a similar business to yours spends 0.62% of their revenue on insurance with Trade Risk, you don’t know exactly what types of policies they have or exactly what their business activities include.
Use this information as a starting point, but don’t rely on it for setting your annual insurance budget.
In a perfect world your insurance spend should be based on your actual risk management needs rather than being limited by budget, but of course we understand that managing costs are an important part of business.
Our team of brokers have looked after thousands of trade and building businesses, from those wanting the absolute minimum cost through to those who want the maximum protection irrespective of cost.
Talk to us about managing your insurance costs and getting the maximum value out of your annual business insurance budget.
We can also help you with risk mitigation strategies to help manage the cost of your insurance.
We’re not just here to give quotes and manage claims. We’re here as your risk mitigation and business protection partners.
