A survey of sole traders and SME decision makers commissioned by Allianz Commercial has found that a growing proportion of small businesses do not have any insurance while those that do often fail to review their cover needs when their circumstances change. The proportion of SMEs without any cover has grown from 40% in 2021 to 44% in 2022 and the main reasons respondents listed for not insuring their business are:
- The business is too small (mentioned by 47% of respondents)
- I work from home (42%)
- No customers come to my premises (34%)
- There’s not much to insure, e.g. no premises, no vehicles (33%)
The only legal requirements in the UK are for businesses with staff to have employers liability insurance and for those with vehicles to have motor insurance, but many SMEs would find it hard to recover from a loss without an insurance payout. For those that do have a policy in place, the level of compensation will depend on the level of cover they purchased.
Over the past 12 months, a significant share of SMEs have modified the way they operate. Some have increased the number of products or services they offer (19%), others have changed the nature of these products or services (16%), and some have gone back to the office or shop (16%). Yet, only 41% altered their insurance policy to reflect changes in their circumstances; a majority (52%) didn’t.
IE COMMENT: BI CLAIMS SHAMBLES & RIGID PRODUCTS = CONSUMER SCEPTICISM
One of the big stumbling blocks for all insurers is the fall-out from the BI claims refusal, which saw pandemic restrictions by the UK governments close businesses down, and then insurers refuse to pay out. It took FCA action to force insurers to head off embarrassing court cases and pay claims. Hardly surprising that many small companies feel the BI interruption policy isn’t worth the premiums. Trust needs to be rebuilt.
Another problem is the one-size-fits-all approach on business insurance. Many companies have no significant stock to insure, neither do they have a fleet of vehicles or staff above 50 persons, full and part-time. But almost every small biz needs flexible cyber cover, tailored for their unique sector.
However insurers are now asking companies of all sizes to come up with detailed resilience plans to keep their business going after a cyber attack, vet their third party supplier and accountant emails every day, install anti-virus software, set up a back-up server network, websites and email accounts in case of denial of service etc. You can argue all that is sensible planning, which it is. But if you do all that, spend all that money on creating an alternative online eco-system, then why would you need cyber insurance? You’ll never need to claim, just switch over to your reserve network and crack on.
You can even incorporate a new holding company and put your assets in there if you suffer reputational damage, thus limiting any future consumer or business partner claims, then start again as a new brand.
The tech exists now to let small, micro accounts level companies to build their ideal online insurance cover via app, then panel that quote out to specialised companies in say media, home delivery, subcontractor/freelance building services, gardening, dog walking and so on. People can see where the big risks are in their niche, all we have do in the industry is offer cover that pays out if the worst happens.
AS SMEs EVOLVE, THE INSURANCE NEEDS TO CHANGE
This is significant because it contrasts with what happened during lockdown last year. A previous wave of the survey, carried out in March 2021, found that SMEs also adapted their operations in the 12 months prior: 20% worked from home, 17% reduced products and services, 15% reduced staff. At the time, 48% changed their insurance policy to reflect their new circumstances. This year, only 41% did.
“Roughly speaking, SMEs were quick to reduce their coverage during lockdown but they didn’t review it upwards when their activities picked up again,” explains Helen Bryant, director of digital trading at Allianz Commercial. “With payroll, stock and profit coming back to pre-pandemic levels, they risk being underinsured if they don’t make the necessary adjustments – which might be tempting in the current economic climate. However, that would be a bad calculation in the longer term: if their level of cover doesn’t match their activity levels and they need to claim, the compensation they’ll receive may leave them out of pocket.”
Soaring prices are front of mind for SMEs. Asked about the major challenges and threats facing their business, survey respondents place inflation first (cited by 33% of them), cash flow second (29%) and competition third (27%). These are well ahead of business interruption (17%), which was the top concern last year (26%). In stark contrast, in March 2021, only 8% of respondents cited issues with paying outgoing bills.
ENTREPRENEURS ARE OPTIMISTS
Many SMEs seem overoptimistic about how long it would take them to recover from an unexpected event. For instance, if their commercial property was destroyed by a fire, 69% of respondents believe their business would be back up and running to its current level within one year. This doesn’t necessarily take into account all the work involved, from cleaning, securing, repairing the site and replacing equipment to getting planning permissions, dealing with environmental risks, retraining staff and winning back customers. A more realistic estimate is actually two years to get back to pre-loss levels.
Here are the elements SMEs should review to ensure they are adequately covered:
- Policy limits are often based on turnover, profit or payroll. If those are up, then limits need to be reviewed.
- Sums insured may have changed for buildings and contents, and most likely stocks as activities restart.
- The indemnity period for business interruption should generally be 24 months for SMEs to account for clearance, design and planning, rebuilding, replacing equipment and sourcing stock, and rebuilding the supplier and customer base.