Clients under cashflow pressure after today's cash rate rise may look to strip back cover to save money and brokers will need to talk them out of the cheaper decisions that carry the largest exposures. This afternoon, the Reserve Bank of Australia's Monetary Policy Board has lifted the cash rate target by 25 basis points to 4.60%, the fourth increase this year and the highest setting since late 2011. The decision was unanimous.
Cynthia Yap (pictured), managing director of Dynamic Insurance Services in Australia, said the immediate consequence for broking businesses is limited, but the effect on the clients they advise is not.
"The direct impact on an insurance broker is relatively limited, but the indirect impact on our clients can be significant," Yap said.
Higher rates increase financing costs and squeeze business cash flow, she said, and they land on businesses already carrying higher wages, operating costs and insurance premiums. Affordability becomes the question that governs the renewal conversation.
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Her warning is about what clients do next.
"Simply reducing sums insured, removing covers or increasing excesses to save money can create much larger financial exposures later," Yap said.
That is where the advice matters, she said. "Our role is to help clients find the right balance between affordability and adequately protecting the business."
Yap expects more businesses to fund premiums rather than pay annually in advance because it preserves working capital and spreads the cost across the year. She was careful to note the catch. Premium funding is itself a form of finance, she said, so its cost has to be weighed in a higher interest rate environment. A client who moves to funding to protect cash flow is taking on borrowing at a moment when borrowing has become more expensive.
The Reserve Bank said inflation remains elevated and that upside risks flagged in August are materialising. It pointed to the broadened conflict in the Middle East and to global energy prices now well above the levels assumed in its August forecasts, along with demand related to artificial intelligence driving rapid growth in global prices for technology-related goods.
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The Board also said its liaison indicates firms are experiencing cost pressures and are either raising prices or looking to do so.
"The three increases in the cash rate target since the beginning of the year have tightened financial conditions and the economy appears to be slowing," the Board said in its statement. "But inflation is still too high and the Board judged that, in light of recent developments, a further tightening in financial conditions is warranted to support a return of inflation to target in a reasonable period."
The Board said it would continue to do what it considers necessary to bring inflation sustainably back to target, including raising the cash rate target further if needed.
The Australian Bureau of Statistics releases September quarter inflation data tomorrow.
