Blog: SMEs must reinstate pre-pandemic cover levels or risk being underinsured

Many SMEs – rightly – decided to reduce their cover during the Covid-19 lockdown, but have failed to reset it since resuming normal work. The trend is very worrying. This exposes them to a great risk, as if the policy purchased does not match the level of activity, then any claim these businesses make may be paid out at a reduced rate. In the current economic climate, suffering a loss that is not fully compensated could deal a severe blow to a business.

A survey of sole traders and SME decision-makers found that not only is the proportion of uninsured businesses on the rise from 40% in 2021 to 44% in 2022, but insured businesses have been slower to update their cover.

It might be tempting to save on insurance premiums at a time when so many prices are rising. The energy cap does not apply to SMEs, and electricity and gas bills are skyrocketing. The cost of materials, which had started ballooning with Brexit and Covid-19, is now reaching stratospheric heights.”

Policy changes

In 2021, 48% of surveyed businesses had changed their policy to reflect the changes in their circumstances over the previous 12 months, from being forced to cut or furlough staff to reducing products and services, and working from home. This year, so far, only 41% of surveyed businesses had amended their policy to account for changes – and these changes usually have gone in the other direction, for instance increasing the number of their products or services, or returning to the office or shop.

It might be tempting to save on insurance premiums at a time when so many prices are rising. The energy cap does not apply to SMEs, and electricity and gas bills are skyrocketing. The cost of materials, which had started ballooning with Brexit and Covid-19, is now reaching stratospheric heights.

Allianz’s survey shows that inflation is pretty much front-of-mind for SMEs. Clearly, it is their number one concern (cited by 33% of respondents) with cash flow second (29%). In such a tense context, cutting corners might be enticing, but it would be a dangerous miscalculation.

To receive the correct compensation if they suffer a loss, businesses will need to have the right level of cover. Here are the elements they need to review in a post-lockdown world.

Post-lockdown world

Policy limits – The limits for many business interruption or liability policies are based on turnover, profit or payroll. Lockdown closures resulted in smaller revenues, while staff reduction or furlough led to lower payroll. Once employees and customers are back, though, these figures need to be reviewed, especially for hospitality, leisure and retail businesses, where they varied most.

Sums insured – These relate to property and contents – in particular, stock. In this regard, inventories need updating. With restrictions lifted, business has now picked up, volumes are on the rise, and stocks are higher than during lockdown, especially in those sectors that have to stockpile in response to supply chain disruption.

With restrictions lifted, business has now picked up, volumes are on the rise, and stocks are higher than during lockdown, especially in those sectors that have to stockpile in response to supply chain disruption.”

As for property, it is not so much a post-lockdown adjustment as an actual valuation that is required. In the survey, 56% of SMEs that own property do not know its rebuild value. Professional valuation is recommended at the start of the policy, and regularly thereafter depending on the nature of the business and the prevailing economic environment. In between these, online calculators can help to check that the sums insured remain accurate. High inflation is currently increasing the cost of replacing stock or repairing buildings.

Indemnity periods – For BI policies, many SMEs choose a 12-month indemnity period, which is overly optimistic. If their property was destroyed by a fire, the survey respondents expected, on average, that it would take their business more than nine months to get back to its pre-loss level. That hardly accounts for site clearance; design and planning; rebuilding; replacing equipment and sourcing stock, and rebuilding the supplier and customer base.

The rebuild time itself is longer than before the Covid-19 pandemic, as the construction industry has been experiencing skills and materials shortages. For all these reasons, SMEs are usually recommended a 24-month indemnity period.

Small businesses cannot afford to take risks with their levels of insurance. Insurers and brokers need to focus on helping them understand their policies and ensuring they have the right level of cover to be properly protected.