A recent survey of UK SMEs and sole traders commissioned by Allianz Commercial, revealed that a growing number of small businesses did not have any commercial insurance in place and those that did, had insufficient cover to meet needs should an unexpected event occur.
In fact in 2022 the proportion of SMEs without any cover at all increased to 44% (from 40% in 2021). This is a surprising number and a concern in this uncertain economic climate. Not just for the businesses themselves who may not be able to recover if an unexpected event occurs, but to those that rely on the business for products or services, for their suppliers and their staff.
There were a variety of reasons given as to why insurance wasn’t in place, including:
- The business is too small to warrant having insurance
- Working from home meant they didn’t feel they needed insurance
- Customers didn’t come to their premises so cover was unnecessary
- They didn’t have a premises or vehicle so there wasn’t much to insure
The risks of underinsurance
Currently in the UK, any business employing staff must have employers’ liability cover and motor/fleet insurance if they use vehicles, alongside any other legally required industry specific insurance. But there are many other types of insurance that a business should consider to help protect against an unexpected event. These may include public liability insurance, professional indemnity insurance, business interruption, buildings and contents cover, key man cover and more.
If suitable cover isn’t in place, a business may struggle to recover without the financial pay out that suitable insurance protection can provide. Making sure that your business has the right cover arranged at the right level should be a serious consideration for your business. The financial pay out and access to expert advice will ensure that you are able to fully recover from any incident that befalls the business, in a timely manner, so you can get back up and running as quickly as possible.
In addition to highlighting a lack of insurance, the survey also revealed that many businesses adapted their operations during the first lockdown in 2020. This typically included reducing output and staff numbers to reduce overall costs, and was reflected in their insurance cover levels. Whilst this was prudent at the time, to keep costs down for business survival, as businesses began to recover from the slowdown of the pandemic and either diversified or increased their output again, they did not go on to amend their insurance cover levels to match new operating methods and levels.
This may leave the business at risk of underinsurance. In the short term leaving cover levels at a lower level may help reduce costs but if you need to make a claim in the future, cover levels won’t match expenditure, which means the compensation received won’t match needs.
The length of expected recovery time following a disaster is also an area for closer consideration. Whilst 69% of those surveyed said that their business would be up and running again within a year of a total loss event, this might be optimistic, depending on your business set up. You could encounter delays in the set up of a new system or see lengthy delays in bespoke machinery that you need to operate effectively. Recovering from a total loss event, such as a fire at your premises, will mean a rebuild of everything including the physical premises, systems, staff (who may find alternative employment), suppliers and of course your customer base, who might have gone elsewhere during your recovery period.
Rising inflation is contributing to the underinsurance risk too. SMEs are becoming increasingly concerned about soaring prices, which are not only a challenge to the day to day running of the business but also to the level of cover that needs to be in place. With building materials and labour costs increasing, the investment required to rebuild your premises could be substantially more than you thought.
How to ensure you are protecting your business from underinsurance
There are some simple steps that you can take to make sure that your business is protected from underinsurance:
- Check your policy limits. These are often based on turnover, profit or payroll levels, so if any of these have increased, your policy limits will need to reflect these.
- Review your building sums insured. These should be based on the cost to rebuild your property following a total loss event, such as a fire or flood. With the increase in raw material costs, labour and transport etc, you may find they are not set at the correct levels.
- Review the stated indemnity period on any Business Interruption cover. You should speak with your insurance broker to discuss whether or not your current indemnity period is long enough. Having time to wait for site clearance, planning and design, the rebuild, acquiring any new machinery and restocking, will be invaluable. You will also need time to source new suppliers or rebuild links with previous suppliers, as well as rebuilding your customer base.
How we can help
If you’re concerned that your business doesn’t have the right insurance in place or that your insurance isn’t at the right level to meet your needs, our experienced commercial brokers will be pleased to help. As an SME ourselves we understand the risks that your business faces and we can review your current insurance to make sure that it would be sufficient to protect your business in the event of an unexpected incident.