Axa's Jon Walker on SMEs and underinsurance

Insurers and brokers must make sure SMEs have the right level of cover in place because, quite simply, it’s our job to protect them, and if that wasn’t enough, the reputation of the insurance industry is at stake.

Many businesses don’t have the types or levels of cover they need. Entrepreneurs and business owners know their trade, their customers, their region – but the chances are they are not insurance experts or as focused on the administrative side of running their business.

It is our role to make the purchase of insurance as easy as possible, but not at the expense of fully understanding the needs of the business and putting adequate cover in place. We must convey clearly what their legal requirements are: employers liability if they employ staff; professional indemnity if they provide business advice to clients; motor cover if vehicles are used for business purposes – to state the obvious.

We must also stress how important public liability insurance is; it isn’t compulsory, but can a small business afford to pay if a member of the public is injured on its premises or if a customer’s property is damaged? Bodily injury claims can reach tens of thousands of pounds, more for life-changing injuries. Faced with such a bill, many SMEs would simply go out of business if they didn’t have PL cover.

When we surveyed start-up businesses three years ago, 72% of entrepreneurs without cover said their business was ‘too small’ to need it.

At a time when the UK is experiencing a rapid rise in self-employment, it is worth noting that freelance professionals are the least insured section of the economy. Only a quarter of those in their first three years of business have professional indemnity cover.

Sum insured and indemnity period

Building further, insurers need to also ensure customers purchase the right level of insurance. For a property policy, that means evaluating the sum insured accurately. And for a business interruption policy, that means choosing the correct indemnity period. If policyholders underestimate any of these two figures, their business is underinsured.

All buildings should be insured for their full rebuild value, including the cost of demolition and debris removal. If the sum insured is lower than the actual rebuild value, and thus the premium paid is lower, the value of any claim will be reduced by a similar proportion. In other words, if a small business gets its sum insured wrong and later needs to make a claim, it will be out of pocket.

Similarly, many SMEs choose the minimum indemnity period of 12 months for their Business Interruption policy – and it might be enough to rebuild their premises after a fire or reinstate it after a flood. But will it be long enough for the business to make it back to the same level of trading as before the loss?

Insurers and brokers must help their customers get both their sum insured and BI requirements right. It is their role to guide them and give them practical tips and, alongside trade bodies, insurers offer a variety of online tools to estimate both components. They can also recommend reliable partners, like property valuation specialists or chartered surveyors.

Insurers will always be keen for brokers to use these tools and partners because the establishment of accurate insurance needs and meeting of them sits largely in the commercial market with brokers.  

All of the evidence points to insurers and brokers needing to do more to inform SMEs of their risks and how best to mitigate and protect against them. This is, of course, a key part of being seen as a trusted advisor and being part of a professional industry that can be trusted to pay a claim and look after SME customers when they need us most.