Underinsurance - a risk for both insurers and SMEs
Insurance: it’s one of those things you hope you will never need, but you can’t operate without. When things go wrong, there’s nothing more reassuring than knowing your business is covered.
Yet many small and medium enterprises (SMEs) are unwittingly underinsured. 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
Worryingly, according to the Federation of Small Businesses almost 500,000 UK small businesses are currently ‘at risk of going bust within weeks’. This makes for disturbing reading given that not having enough insurance can prove disastrous: from employee redundancies and the loss of future contracts to being put out of business.
Why is underinsurance still a problem?
In many cases, it’s because SMEs lack the time and expertise to assess their insurance needs. In other cases, they will underestimate the cover they need, or they may undervalue their businesses to reduce insurance premiums.
Other SMEs fall foul of undervaluing what it would cost to rebuild a commercial property, which can differ from the market value. Research tells us that on average, underinsured buildings are covered for just 68% of the amount they should be.
In fact, recent research has found that 80% of UK properties are underinsured – to put that in context, that’s around 587,000 high net worth homes and commercial property with a total value of £340 billion standing without adequate buildings insurance. What’s more, those numbers are heading in the wrong direction, having risen from 580,000 and £325 billion respectively in the space of 12 months.
The reason for this? They may have failed to factor in market fluctuations in property prices and possible delays in repairing the property and issues with global supply chains pushing up the price of building materials. According to the Department for Business, Energy, and Industrial Strategy in 2021 the price of timber increased by 73.3%, steel by 72.6% and the cost of materials generally by 23.6%. Compounding the issue further is constantly rising inflation rates.
Another problem is that SMEs might not be receiving the right guidance despite the rise of online brokerages that are designed to save time and keep costs low.
“This is becoming a big reason for underinsurance,” says James Tingley, head of SME commercial division at insurance brokerage Aston Lark. “The fact is, insurance policies still comprise a lot of technical jargon, despite efforts to simplify the process. SMEs can therefore become confused about what they’re insuring for, and how much cover is required.”
Insurance companies can play a major role in solving the problem by creating underwriting processes that are easier to understand and more straightforward. This can include eliminating complex jargon and creating onboarding processes that demand less information from business owners.
For example, SMEs are often required to provide significant amounts of information to insurers around revenue and profits, but this is not always quickly verifiable and leads to an insurance gap. Moreover, insurers can reduce friction and ease the burden by introducing more automation and streamlining the underwriting process.
Miscalculated profits can affect policies
A key policy for SMEs is business interruption (BI) insurance, which compensates for the loss of income after a disaster – and this is where many SMEs are tripping up.
According to the Chartered Institute of Loss Adjusters (CILA) 43% of business interruption insurance demonstrate underinsurance, with the average shortfall 53%.
The big problem is the indemnity period. This is how long SMEs think it will take their business to get back on its feet. The British Insurance Brokers’ Association (BIBA) says it takes a small business about two years to fully recover. But it’s estimated around three quarters (75%) of BI policies have an indemnity period of just 12 months.
One of the major reasons for not having enough BI cover is when companies miscalculate their profits.
A gross profit basis is the most common choice of BI cover. But what an insurer defines as gross profit is vastly different to a business accountant’s definition – often resulting in a heap of confusion among small firms.
While most accountants will exclude staff wages and utility costs from gross profit, insurers do not – and will build in calculations such as payroll and ongoing employee costs. As such, firms should ensure their assessment of gross profit matches the one in the insurance policy.
Underinsurance is a headache for insurers
The risks related to underinsurance don’t just affect SMEs. Insurers also feel the hit as inadequate insurance premiums erupt into disputes and litigation between the policyholder and provider.
With SMEs making up 99% of the business population, the time and resources spent dealing with these disputes can be significant.
For insurers, the challenge is to not only educate SMEs on the dangers of inadequate cover – such as insolvency – but also to ensure they are being matched with the right blend of insurance products. Insurers want to model risk as accurately as possible and make sure the right claims are being paid out
The problem is that this has proved difficult in the past, in part because insurers and SMEs may have different definitions of what constitutes gross profit, or because companies experiencing rapid growth need to factor in rapidly rising revenues.
The solution to these challenges may lie in an underwriting process that makes better use of automation, injecting accurate insights into the process so that risk can be assessed more accurately. SMEs are often short on time and resources, which means a better customer experience is not just a nice-to-have, but essential to the success of their business. Time spent on admin and form-filling is time spent away from other crucial areas, and anxiety about insurance cover can eat into their bottom line.
Insurers can help to ease their burden by offering a streamlined service that takes advantage of live company data to determine the right level of cover for their needs.
How can FullCircl help brokers tackle SME underinsurance?
Download our guide to find out how FullCircl can support you whilst discussing underinsurance.
FullCircl empowers your brokers with rich, contextualised company information on every business in the UK and Ireland.
Think of all the elements you need to consider in order to make an accurate underwriting presentation. Perhaps you need to filter by geographical region, turnover, or employee headcount. Or maybe you need to uncover more specific details, like size of fleet, or property exposure.
All of this takes time, and the information is often out of date the moment you find it. FullCircl targets companies in real-time, so you know what they actually look like – giving you a better focus on opportunities to fill the SME underinsurance gap.
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