Under-Insuring Small and Medium Businesses (SMEs) - A Critical Problem
In recent years, the Financial Conduct Authority, as well as other financial and insurance bodies have become increasingly concerned about the rise in under-insurance amongst small and medium enterprises (SMEs). With the impending Brexit, the implications of under-insurance may become even more dire as the value of the pound is likely to drop. In addition, replacement products and services being imported from Europe could take longer to arrive – increasing the length of interruption to a business following a loss[i].
This under-insurance inevitably results in serious problems in the event of an SME making a claim – in some cases, the results are devastating, with companies being unable to recover from the loss. The knock-on effect is also a loss in reputation of the insurer, as the client is disappointed with the level of protection they have received. BIBA has been so concerned about the matter that they have produced a guide specifically to approach the issue of SME under-insurance. In it, they point out that 40% of companies are unable to recover with the level of interruption cover that they have purchased.
Why are SMEs so likely to be under-insured?
SMEs are unlikely to have staff available to think specifically about business risks, costs and values. In many cases, they may be made up of an individual or team of people with very specific skills; plumbing, teaching, web design or marketing - but with little or no experience of business risk assessments. These companies have also often been built from the ground up – from small start-ups that have required very little in the way of professional indemnity, interruption cover or other aspects of business insurance. Some of these companies may perceive the amounts quoted to them for comprehensive business insurance cover as an unreasonable and unnecessary expense. The amounts charged may seem arbitrary and excessive to them. While these businesses have a responsibility to educate themselves and insure themselves to the correct value across all potential risks, the insurance company or broker must also try to assist in this process.
How can insurance companies and brokers help?
Show the risks are real
An SME Director may be unaware of the risks and consequences of under-insurance. In many cases, they won’t know of anyone who has relied on insurance cover to get back on their feet following a critical business loss. For example, many SMEs would not consider the need to insure against cyber-attacks - and yet in 2015, a UK Government survey found that a massive 69% of large companies and 38% of small businesses had been attacked online within the previous year.
[iii] Providing clients with statistics, case studies and examples can help business owners to understand the reality of the need for these types of insurance covers – possibly encouraging them to think more seriously about accurately assessing the sums involved when purchasing insurance policies.
Be clear about the information you require from your client (and why)
The Financial Ombudsman Service has highlighted occasions on which an insurance company has been unclear in the way in which they have questioned the clients on their insurance requirements; in some cases asking “what is the level of cover you require?” instead of stating clearly “what is the value of all the items [in your home / business]?”
[iv] In these situations, where the requirements of the insurance company are open to interpretation, the insurer may be found to blame for any under-insurance that results. Clients must understand the potentially crippling consequences of underestimating the values involved in the property, personal liability, interruption cover or professional indemnity of their business. Under-insuring their business may not only cause problems in the event of making a claim higher than the amounts that they have estimated; but in the event of any claim at all - with the potential to lose a percentage of any claim they feel is owed to them, corresponding to the percentage to which they have under-insured their business.
Help with calculations
It can be difficult for an SME Director to assess the potential amounts that could be involved in a public liability or professional indemnity case, therefore making it extremely difficult to calculate the level of cover that they should be requesting on insurance forms. It could be a good idea to offer guides for valuing a business properly. This may involve making the initial forms and questions more detailed – perhaps helping the client create inventories of business assets, looking at viable monetary figures for professional indemnity and public liability and working out the risks of cyber-attacks. It could even be worth offering the services of risk management professionals for a formal consultation before choosing an insurance plan.
While these interventions may require considerable time and energy, they can be extremely worthwhile. Aside from making sure that the insurers are receiving a fair policy price for the service they are providing, de-creasing events of under-insurance will have the knock on effect of increasing client satisfaction in the event of a claim.
[i] BIBA, 'Biba Urges Businesses to Avoid Under-Insurance Following the Brexit Effect' ( 2016) https://www.biba.org.uk/press-releases/biba-urges-businesses-avoid-insurance-following-brexit-effect/ accessed 10th April 2017
[ii] BIBA. How to Avoid Under-Insurance. A BIBA Guide for Small and Medium-Sized Businesses, 5.
[iii] BIBA. How to Avoid Under-Insurance. A BIBA Guide for Small and Medium-Sized Businesses, 10.
[iv] Financial Ombudsman Service, 2014. Under-Insurance. Ombudsman News, Issue 121, 3.