SMEs are risking catastrophe with underinsurance – is yours one of them?

The world of insurance is proving a minefield for many businesses across the UK, who are either not properly insuring all aspects of their business—from their premises to their technology—or have no insurance in place at all. 

Despite the fact that business insurance is a critical safety net, a new survey from the Association of British Insurers (ABI) and Public First has shed light on the levels of “uninsurance” and “underinsurance” in UK small businesses. 

It found that a surprisingly significant number of SMEs don’t have compulsory insurance (for example, 39% of firms with one to nine employees said they didn’t have employers’ liability insurance), while 28% of sole traders reported having no insurance at all.

Insufficient protection

While the need for cyber insurance has hit the headlines in recent weeks, these latest findings suggest that, actually, many small businesses need to completely rethink their insurance protections. 

In particular, underinsurance—when the cover is less than the potential liability—is a widespread issue. The Small Business, Big Risk: Tackling SME Underinsurance project, which surveyed 1,002 SME owners, found that businesses are using insurance policies that fall desperately short of their needs. 

Indeed, 48% of respondents said their business had a physical premises, but less than a quarter had business interruption insurance, while 39% of businesses with company vehicles said they didn’t have commercial vehicle insurance (a compulsory cover).

Technology deployment is also a huge area of concern. More than half (57%) of the respondents reported having portable electronic equipment, but only 31% said they have commercial contents insurance. When it came to software or cloud services, only 29% shared that they had cyber protection insurance.

No regular review processes

The survey also revealed that many small business owners are putting insurance in place, but are not reviewing their policies regularly to ensure that their needs are still being met. “Only half of respondents said they had reviewed the types of insurance they hold or their level of cover in the past 12 months,” the researchers shared. 

As a result, some businesses have areas of their venture that are completely uninsured, and others that are underinsured. Both these scenarios are potentially dangerous. 

A statement accompanying the findings said: “The consequences of inadequate insurance are sometimes catastrophic. We heard of businesses that had to close after experiencing an unexpected incident without sufficient cover.”

Chris Bose, ABI Director of General Insurance Policy, echoed the warning: “SMEs are the backbone of our economy, and having the right insurance protection is essential to helping them stay resilient when the unexpected happens. From cyber incidents to supply chain shocks, the right cover can mean the difference between a temporary setback and a potentially devastating halt to operations.”

What support do SMEs need?

The ABI has created a new guide, which it hopes will clarify what different insurance products are available to small businesses, as well as the most common requirements for them to help them sidestep risks like compliance failures. 

Andrew Harrop, Director at Public First and co-author of the report, said that the guide has been created to counter the prevalent “misunderstanding, low awareness and concerns about affordability” that are stopping SMEs from being covered. 

However, both organisations argue that SMEs need more support from “insurers, intermediaries, business bodies and government”, especially when it comes to education. The release of the guide is being used as an opportunity to lobby for this support.  

The two bodies are arguing for a “time-limited engagement campaign” to boost awareness of the risks of uninsurance and underinsurance, and the benefits of properly insuring your operation. 

Call to action

However, they also state that there is a clear need for insurers to make their products more easily accessible for business owners so they understand exactly what they need and how to get it. More knowledge would better empower businesses to tailor their insurance to their needs, resulting in higher take-up. 

While the survey did reveal that business owners are generally very positive about their insurance policies, the gaps were still glaring, both in terms of coverage and knowledge. 

This survey serves as a warning that complacency or lack of understanding can lead to huge financial issues; but that insurers, brokers and the Government have a role to play in helping SMEs avoid these detrimental scenarios.